Poseida Therapeutics (NASDAQ:PSTX) Has Debt But No Earnings; Should You Worry?

Howard Marks put it nicely when he said that, rather than worrying about share price volatility, 'The possibility of permanent loss is the risk I worry about... and every practical investor I know worries about.' 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 can see that Poseida Therapeutics, Inc. (NASDAQ:PSTX) does use debt in its business. But should shareholders be worried about its use of debt?

What Risk Does Debt Bring?

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. 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. Of course, debt can be an important tool in businesses, particularly capital heavy businesses. When we think about a company's use of debt, we first look at cash and debt together.

View our latest analysis for Poseida Therapeutics

What Is Poseida Therapeutics's Net Debt?

The chart below, which you can click on for greater detail, shows that Poseida Therapeutics had US$58.5m in debt in September 2023; about the same as the year before. But it also has US$238.8m in cash to offset that, meaning it has US$180.3m net cash.

A Look At Poseida Therapeutics' Liabilities

Zooming in on the latest balance sheet data, we can see that Poseida Therapeutics had liabilities of US$77.0m due within 12 months and liabilities of US$101.6m due beyond that. On the other hand, it had cash of US$238.8m and US$8.67m worth of receivables due within a year. So it can boast US$68.9m more liquid assets than total liabilities.

It's good to see that Poseida Therapeutics has plenty of liquidity on its balance sheet, suggesting conservative management of liabilities. Because it has plenty of assets, it is unlikely to have trouble with its lenders. Simply put, the fact that Poseida Therapeutics has more cash than debt is arguably a good indication that it can manage its debt safely. When analysing debt levels, the balance sheet is the obvious place to start. But it is future earnings, more than anything, that will determine Poseida 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.

Over 12 months, Poseida Therapeutics made a loss at the EBIT level, and saw its revenue drop to US$50m, which is a fall of 67%. To be frank that doesn't bode well.

So How Risky Is Poseida Therapeutics?

Statistically speaking companies that lose money are riskier than those that make money. And we do note that Poseida Therapeutics 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$64m and booked a US$131m accounting loss. But the saving grace is the US$180.3m on the balance sheet. That means it could keep spending at its current rate for more than two years. Even though its balance sheet seems sufficiently liquid, debt always makes us a little nervous if a company doesn't produce free cash flow regularly. When analysing debt levels, the balance sheet is the obvious place to start. However, not all investment risk resides within the balance sheet - far from it. Be aware that Poseida Therapeutics is showing 3 warning signs in our investment analysis , you should know about...

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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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.