Is PhaseBio Pharmaceuticals (NASDAQ:PHAS) Using Debt Sensibly?

Legendary fund manager Li Lu (who Charlie Munger backed) once said, 'The biggest investment risk is not the volatility of prices, but whether you will suffer a permanent loss of capital.' When we think about how risky a company is, we always like to look at its use of debt, since debt overload can lead to ruin. As with many other companies PhaseBio Pharmaceuticals, Inc. (NASDAQ:PHAS) makes use of debt. But should shareholders be worried about its use of debt?

Why Does Debt Bring Risk?

Debt assists a business until the business has trouble paying it off, either with new capital or with free cash flow. If things get really bad, the lenders can take control of the business. However, a more usual (but still expensive) situation is where a company must dilute shareholders at a cheap share price simply to get debt under control. Having said that, the most common situation is where a company manages its debt reasonably well - and to its own advantage. When we examine debt levels, we first consider both cash and debt levels, together.

View our latest analysis for PhaseBio Pharmaceuticals

What Is PhaseBio Pharmaceuticals's Debt?

The image below, which you can click on for greater detail, shows that at June 2020 PhaseBio Pharmaceuticals had debt of US$14.8m, up from US$9.69m in one year. But on the other hand it also has US$53.0m in cash, leading to a US$38.2m net cash position.

How Healthy Is PhaseBio Pharmaceuticals's Balance Sheet?

According to the last reported balance sheet, PhaseBio Pharmaceuticals had liabilities of US$17.8m due within 12 months, and liabilities of US$26.6m due beyond 12 months. Offsetting these obligations, it had cash of US$53.0m as well as receivables valued at US$896.0k due within 12 months. So it can boast US$9.50m more liquid assets than total liabilities.

This short term liquidity is a sign that PhaseBio Pharmaceuticals could probably pay off its debt with ease, as its balance sheet is far from stretched. Simply put, the fact that PhaseBio Pharmaceuticals has more cash than debt is arguably a good indication that it can manage its debt safely. There's no doubt that we learn most about debt from the balance sheet. But it is future earnings, more than anything, that will determine PhaseBio Pharmaceuticals'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.

Over 12 months, PhaseBio Pharmaceuticals made a loss at the EBIT level, and saw its revenue drop to US$1.3m, which is a fall of 34%. To be frank that doesn't bode well.

So How Risky Is PhaseBio Pharmaceuticals?

By their very nature companies that are losing money are more risky than those with a long history of profitability. And in the last year PhaseBio Pharmaceuticals had an earnings before interest and tax (EBIT) loss, truth be told. Indeed, in that time it burnt through US$55.2m of cash and made a loss of US$65.8m. However, it has net cash of US$38.2m, so it has a bit of time before it will need more capital. Overall, its balance sheet doesn't seem overly risky, at the moment, but we're always cautious until we see the positive free cash flow. When analysing debt levels, the balance sheet is the obvious place to start. But ultimately, every company can contain risks that exist outside of the balance sheet. For instance, we've identified 6 warning signs for PhaseBio Pharmaceuticals (2 are concerning) you should be aware of.

If you're interested in investing in businesses that can grow profits without the burden of debt, then check out this free list of growing businesses that have net cash on the balance sheet.

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