Would Precigen (NASDAQ:PGEN) Be Better Off With Less Debt?

David Iben put it well when he said, 'Volatility is not a risk we care about. What we care about is avoiding the permanent loss of capital.' So it seems the smart money knows that debt - which is usually involved in bankruptcies - is a very important factor, when you assess how risky a company is. We note that Precigen, Inc. (NASDAQ:PGEN) does have debt on its balance sheet. But is this debt a concern to shareholders?

What Risk Does Debt Bring?

Debt assists a business until the business has trouble paying it off, either with new capital or with free cash flow. Part and parcel of capitalism is the process of 'creative destruction' where failed businesses are mercilessly liquidated by their bankers. However, a more common (but still painful) scenario is that it has to raise new equity capital at a low price, thus permanently diluting shareholders. By replacing dilution, though, debt can be an extremely good tool for businesses that need capital to invest in growth at high rates of return. When we think about a company's use of debt, we first look at cash and debt together.

Our analysis indicates that PGEN is potentially overvalued!

How Much Debt Does Precigen Carry?

You can click the graphic below for the historical numbers, but it shows that as of June 2022 Precigen had US$198.7m of debt, an increase on US$177.3m, over one year. However, it does have US$115.3m in cash offsetting this, leading to net debt of about US$83.4m.

A Look At Precigen's Liabilities

According to the last reported balance sheet, Precigen had liabilities of US$29.9m due within 12 months, and liabilities of US$235.7m due beyond 12 months. Offsetting this, it had US$115.3m in cash and US$1.87m in receivables that were due within 12 months. So its liabilities total US$148.4m more than the combination of its cash and short-term receivables.

While this might seem like a lot, it is not so bad since Precigen has a market capitalization of US$306.0m, and so it could probably strengthen its balance sheet by raising capital if it needed to. However, it is still worthwhile taking a close look at its ability to pay off debt. When analysing debt levels, the balance sheet is the obvious place to start. But it is future earnings, more than anything, that will determine Precigen's ability to maintain a healthy balance sheet going forward. So if you want to see what the professionals think, you might find this free report on analyst profit forecasts to be interesting.

In the last year Precigen wasn't profitable at an EBIT level, but managed to grow its revenue by 109%, to US$105m. So its pretty obvious shareholders are hoping for more growth!

Caveat Emptor

Despite the top line growth, Precigen still had an earnings before interest and tax (EBIT) loss over the last year. Indeed, it lost a very considerable US$76m at the EBIT level. Considering that alongside the liabilities mentioned above does not give us much confidence that company should be using so much debt. Quite frankly we think the balance sheet is far from match-fit, although it could be improved with time. Another cause for caution is that is bled US$66m in negative free cash flow over the last twelve months. So in short it's a really risky stock. The balance sheet is clearly the area to focus on when you are analysing debt. But ultimately, every company can contain risks that exist outside of the balance sheet. For example, we've discovered 4 warning signs for Precigen (1 is a bit unpleasant!) that you should be aware of before investing here.

When all is said and done, sometimes its easier to focus on companies that don't even need debt. Readers can access a list of growth stocks with zero net debt 100% free, right now.

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This article by Simply Wall St is general in nature. We provide commentary based on historical data and analyst forecasts only using an unbiased methodology and our articles are not intended to be financial advice. It does not constitute a recommendation to buy or sell any stock, and does not take account of your objectives, or your financial situation. We aim to bring you long-term focused analysis driven by fundamental data. Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative material. Simply Wall St has no position in any stocks mentioned.