Pluristem Therapeutics (NASDAQ:PSTI) Has Debt But No Earnings; Should You Worry?

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.' It's only natural to consider a company's balance sheet when you examine how risky it is, since debt is often involved when a business collapses. We note that Pluristem Therapeutics Inc. (NASDAQ:PSTI) does have debt on its balance sheet. But is this debt a concern to shareholders?

When Is Debt Dangerous?

Debt and other liabilities become risky for a business when it cannot easily fulfill those obligations, either with free cash flow or by raising capital at an attractive price. Ultimately, if the company can't fulfill its legal obligations to repay debt, shareholders could walk away with nothing. 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. Of course, the upside of debt is that it often represents cheap capital, especially when it replaces dilution in a company with the ability to reinvest at high rates of return. When we examine debt levels, we first consider both cash and debt levels, together.

View our latest analysis for Pluristem Therapeutics

What Is Pluristem Therapeutics's Debt?

The image below, which you can click on for greater detail, shows that at September 2021 Pluristem Therapeutics had debt of US$23.4m, up from none in one year. However, it does have US$60.7m in cash offsetting this, leading to net cash of US$37.2m.

How Healthy Is Pluristem Therapeutics' Balance Sheet?

Zooming in on the latest balance sheet data, we can see that Pluristem Therapeutics had liabilities of US$10.4m due within 12 months and liabilities of US$24.5m due beyond that. On the other hand, it had cash of US$60.7m and US$1.49m worth of receivables due within a year. So it can boast US$27.3m more liquid assets than total liabilities.

This luscious liquidity implies that Pluristem Therapeutics' balance sheet is sturdy like a giant sequoia tree. Having regard to this fact, we think its balance sheet is as strong as an ox. Succinctly put, Pluristem Therapeutics boasts net cash, so it's fair to say it does not have a heavy debt load! 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 Pluristem Therapeutics'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.

Given its lack of meaningful operating revenue, Pluristem Therapeutics shareholders no doubt hope it can fund itself until it has a profitable product.

So How Risky Is Pluristem Therapeutics?

By their very nature companies that are losing money are more risky than those with a long history of profitability. And the fact is that over the last twelve months Pluristem Therapeutics lost money at the earnings before interest and tax (EBIT) line. And over the same period it saw negative free cash outflow of US$34m and booked a US$53m accounting loss. With only US$37.2m on the balance sheet, it would appear that its going to need to raise capital again soon. 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. Case in point: We've spotted 5 warning signs for Pluristem Therapeutics you should be aware of, and 1 of them is a bit concerning.

At the end of the day, it's often better to focus on companies that are free from net debt. You can access our special list of such companies (all with a track record of profit growth). It's free.

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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.