PhaseBio Pharmaceuticals (NASDAQ:PHAS) Has Debt But No Earnings; Should You Worry?

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. We note that PhaseBio Pharmaceuticals, Inc. (NASDAQ:PHAS) does have debt on its balance sheet. But the more important question is: how much risk is that debt creating?

When Is Debt Dangerous?

Generally speaking, debt only becomes a real problem when a company can't easily pay it off, either by raising capital or with its own 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. Having said that, the most common situation is where a company manages its debt reasonably well - and to its own advantage. When we think about a company's use of debt, we first look at cash and debt together.

See our latest analysis for PhaseBio Pharmaceuticals

How Much Debt Does PhaseBio Pharmaceuticals Carry?

The image below, which you can click on for greater detail, shows that PhaseBio Pharmaceuticals had debt of US$11.4m at the end of March 2021, a reduction from US$15.0m over a year. However, its balance sheet shows it holds US$77.0m in cash, so it actually has US$65.5m net cash.

A Look At PhaseBio Pharmaceuticals' Liabilities

The latest balance sheet data shows that PhaseBio Pharmaceuticals had liabilities of US$16.7m due within a year, and liabilities of US$75.7m falling due after that. Offsetting these obligations, it had cash of US$77.0m as well as receivables valued at US$896.0k due within 12 months. So its liabilities outweigh the sum of its cash and (near-term) receivables by US$14.6m.

Of course, PhaseBio Pharmaceuticals has a market capitalization of US$162.1m, so these liabilities are probably manageable. But there are sufficient liabilities that we would certainly recommend shareholders continue to monitor the balance sheet, going forward. While it does have liabilities worth noting, PhaseBio Pharmaceuticals also has more cash than debt, so we're pretty confident it can manage its debt safely. The balance sheet is clearly the area to focus on when you are analysing debt. 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're focused on the future you can check out this free report showing analyst profit forecasts.

Since PhaseBio Pharmaceuticals doesn't have significant operating revenue, shareholders may be hoping it comes up with a great new product, before it runs out of money.

So How Risky Is PhaseBio Pharmaceuticals?

We have no doubt that loss making companies are, in general, riskier than profitable ones. And we do note that PhaseBio Pharmaceuticals had an earnings before interest and tax (EBIT) loss, over the last year. And over the same period it saw negative free cash outflow of US$47m and booked a US$111m accounting loss. But at least it has US$65.5m on the balance sheet to spend on growth, near-term. Overall, we'd say the stock is a bit risky, and we're usually very cautious until we see positive free cash flow. There's no doubt that we learn most about debt from the balance sheet. But ultimately, every company can contain risks that exist outside of the balance sheet. Case in point: We've spotted 4 warning signs for PhaseBio Pharmaceuticals you should be aware of, and 3 of them shouldn't be ignored.

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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