Is Sutro Biopharma (NASDAQ:STRO) Using Debt In A Risky Way?

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 might be obvious that you need to consider debt, when you think about how risky any given stock is, because too much debt can sink a company. We can see that Sutro Biopharma, Inc. (NASDAQ:STRO) does use debt in its business. But is this debt a concern to shareholders?

Why Does Debt Bring Risk?

Debt assists a business until the business has trouble paying it off, either with new capital or with free 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 usual (but still expensive) situation is where a company must dilute shareholders at a cheap share price simply to get debt under control. By replacing dilution, though, debt can be an extremely good tool for businesses that need capital to invest in growth at high rates of return. When we think about a company's use of debt, we first look at cash and debt together.

See our latest analysis for Sutro Biopharma

What Is Sutro Biopharma's Net Debt?

The image below, which you can click on for greater detail, shows that Sutro Biopharma had debt of US$10.2m at the end of June 2023, a reduction from US$22.3m over a year. However, it does have US$391.6m in cash offsetting this, leading to net cash of US$381.4m.

How Strong Is Sutro Biopharma's Balance Sheet?

Zooming in on the latest balance sheet data, we can see that Sutro Biopharma had liabilities of US$67.1m due within 12 months and liabilities of US$243.1m due beyond that. Offsetting these obligations, it had cash of US$391.6m as well as receivables valued at US$10.00m due within 12 months. So it can boast US$91.5m more liquid assets than total liabilities.

This luscious liquidity implies that Sutro Biopharma's balance sheet is sturdy like a giant sequoia tree. On this view, lenders should feel as safe as the beloved of a black-belt karate master. Succinctly put, Sutro Biopharma boasts net cash, so it's fair to say it does not have a heavy debt load! 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 Sutro Biopharma'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.

In the last year Sutro Biopharma wasn't profitable at an EBIT level, but managed to grow its revenue by 7.0%, to US$57m. We usually like to see faster growth from unprofitable companies, but each to their own.

So How Risky Is Sutro Biopharma?

By their very nature companies that are losing money are more risky than those with a long history of profitability. And we do note that Sutro Biopharma had an earnings before interest and tax (EBIT) loss, over the last year. Indeed, in that time it burnt through US$57m of cash and made a loss of US$143m. But at least it has US$381.4m on the balance sheet to spend on growth, near-term. 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. The balance sheet is clearly the area to focus on when you are analysing debt. However, not all investment risk resides within the balance sheet - far from it. We've identified 2 warning signs with Sutro Biopharma , and understanding them should be part of your investment process.

Of course, if you're the type of investor who prefers buying stocks without the burden of debt, then don't hesitate to discover our exclusive list of net cash growth stocks, today.

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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.