Does PolarityTE (NASDAQ:PTE) Have A Healthy Balance Sheet?

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.' 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 PolarityTE, Inc. (NASDAQ:PTE) does have debt on its balance sheet. But should shareholders be worried about its use of debt?

Why Does Debt Bring Risk?

Debt is a tool to help businesses grow, but if a business is incapable of paying off its lenders, then it exists at their mercy. If things get really bad, the lenders can take control of the business. However, a more frequent (but still costly) occurrence is where a company must issue shares at bargain-basement prices, permanently diluting shareholders, just to shore up its balance sheet. Of course, debt can be an important tool in businesses, particularly capital heavy businesses. When we examine debt levels, we first consider both cash and debt levels, together.

See our latest analysis for PolarityTE

What Is PolarityTE's Net Debt?

As you can see below, at the end of March 2021, PolarityTE had US$4.62m of debt, up from US$536.0k a year ago. Click the image for more detail. However, it does have US$37.2m in cash offsetting this, leading to net cash of US$32.6m.

How Strong Is PolarityTE's Balance Sheet?

Zooming in on the latest balance sheet data, we can see that PolarityTE had liabilities of US$10.0m due within 12 months and liabilities of US$18.7m due beyond that. Offsetting these obligations, it had cash of US$37.2m as well as receivables valued at US$4.32m due within 12 months. So it can boast US$12.8m more liquid assets than total liabilities.

This surplus suggests that PolarityTE is using debt in a way that is appears to be both safe and conservative. Given it has easily adequate short term liquidity, we don't think it will have any issues with its lenders. Simply put, the fact that PolarityTE has more cash than debt is arguably a good indication that 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 PolarityTE'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.

In the last year PolarityTE wasn't profitable at an EBIT level, but managed to grow its revenue by 172%, to US$14m. So its pretty obvious shareholders are hoping for more growth!

So How Risky Is PolarityTE?

We have no doubt that loss making companies are, in general, riskier than profitable ones. And the fact is that over the last twelve months PolarityTE lost money at the earnings before interest and tax (EBIT) line. Indeed, in that time it burnt through US$31m of cash and made a loss of US$47m. With only US$32.6m on the balance sheet, it would appear that its going to need to raise capital again soon. The good news for shareholders is that PolarityTE has dazzling revenue growth, so there's a very good chance it can boost its free cash flow in the years to come. While unprofitable companies can be risky, they can also grow hard and fast in those pre-profit years. The balance sheet is clearly the area to focus on when you are analysing debt. But ultimately, every company can contain risks that exist outside of the balance sheet. For example PolarityTE has 6 warning signs (and 3 which are a bit unpleasant) we think 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. 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.
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