Poseida Therapeutics (NASDAQ:PSTX) 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.' 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. Importantly, Poseida Therapeutics, Inc. (NASDAQ:PSTX) does carry debt. 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. 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 think about a company's use of debt, we first look at cash and debt together.

Check out our latest analysis for Poseida Therapeutics

How Much Debt Does Poseida Therapeutics Carry?

The chart below, which you can click on for greater detail, shows that Poseida Therapeutics had US$58.7m in debt in March 2024; about the same as the year before. However, its balance sheet shows it holds US$198.6m in cash, so it actually has US$140.0m net cash.

How Healthy Is Poseida Therapeutics' Balance Sheet?

According to the last reported balance sheet, Poseida Therapeutics had liabilities of US$84.8m due within 12 months, and liabilities of US$93.2m due beyond 12 months. Offsetting these obligations, it had cash of US$198.6m as well as receivables valued at US$12.0m due within 12 months. So it can boast US$32.7m more liquid assets than total liabilities.

This short term liquidity is a sign that Poseida Therapeutics could probably pay off its debt with ease, as its balance sheet is far from stretched. 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 ultimately the future profitability of the business will decide if Poseida Therapeutics can strengthen its balance sheet over time. 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, Poseida Therapeutics made a loss at the EBIT level, and saw its revenue drop to US$83m, which is a fall of 41%. That makes us nervous, to say the least.

So How Risky Is Poseida Therapeutics?

Statistically speaking companies that lose money are riskier than those that make money. And the fact is that over the last twelve months Poseida Therapeutics lost money at the earnings before interest and tax (EBIT) line. Indeed, in that time it burnt through US$72m of cash and made a loss of US$109m. But the saving grace is the US$140.0m 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. 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. These risks can be hard to spot. Every company has them, and we've spotted 3 warning signs for Poseida Therapeutics you should know about.

If, after all that, you're more interested in a fast growing company with a rock-solid balance sheet, then check out our list of net cash growth stocks without delay.

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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.