Does Surface Oncology (NASDAQ:SURF) Have A Healthy Balance Sheet?

The external fund manager backed by Berkshire Hathaway's Charlie Munger, Li Lu, makes no bones about it when he says 'The biggest investment risk is not the volatility of prices, but whether you will suffer a permanent loss of capital.' 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 Surface Oncology, Inc. (NASDAQ:SURF) does use debt in its business. But the more important question is: how much risk is that debt creating?

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. 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. 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. The first thing to do when considering how much debt a business uses is to look at its cash and debt together.

View our latest analysis for Surface Oncology

What Is Surface Oncology's Net Debt?

The image below, which you can click on for greater detail, shows that at September 2020 Surface Oncology had debt of US$14.6m, up from none in one year. However, it does have US$102.5m in cash offsetting this, leading to net cash of US$87.9m.

How Strong Is Surface Oncology's Balance Sheet?

The latest balance sheet data shows that Surface Oncology had liabilities of US$13.5m due within a year, and liabilities of US$45.1m falling due after that. Offsetting this, it had US$102.5m in cash and US$336.0k in receivables that were due within 12 months. So it actually has US$44.2m more liquid assets than total liabilities.

This surplus suggests that Surface Oncology has a conservative balance sheet, and could probably eliminate its debt without much difficulty. Succinctly put, Surface Oncology 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 Surface Oncology'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 Surface Oncology wasn't profitable at an EBIT level, but managed to grow its revenue by 59%, to US$39m. With any luck the company will be able to grow its way to profitability.

So How Risky Is Surface Oncology?

By their very nature companies that are losing money are more risky than those with a long history of profitability. And in the last year Surface Oncology had an earnings before interest and tax (EBIT) loss, truth be told. And over the same period it saw negative free cash outflow of US$56m and booked a US$24m accounting loss. But at least it has US$87.9m on the balance sheet to spend on growth, near-term. Surface Oncology's revenue growth shone bright over the last year, so it may well be in a position to turn a profit in due course. By investing before those profits, shareholders take on more risk in the hope of bigger rewards. 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. To that end, you should learn about the 4 warning signs we've spotted with Surface Oncology (including 1 which is a bit concerning) .

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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