Legendary fund manager Li Lu (who Charlie Munger backed) once said, '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 note that Syros Pharmaceuticals, Inc. (NASDAQ:SYRS) does have debt on its balance sheet. But should shareholders be worried about its use of debt?
When Is Debt A Problem?
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. While that is not too common, we often do see indebted companies permanently diluting shareholders because lenders force them to raise capital at a distressed price. Having said that, the most common situation is where a company manages its debt reasonably well - and to its own advantage. When we examine debt levels, we first consider both cash and debt levels, together.
What Is Syros Pharmaceuticals's Debt?
The image below, which you can click on for greater detail, shows that at March 2021 Syros Pharmaceuticals had debt of US$39.7m, up from US$19.6m in one year. But on the other hand it also has US$222.1m in cash, leading to a US$182.4m net cash position.
How Healthy Is Syros Pharmaceuticals' Balance Sheet?
According to the last reported balance sheet, Syros Pharmaceuticals had liabilities of US$27.4m due within 12 months, and liabilities of US$83.4m due beyond 12 months. On the other hand, it had cash of US$222.1m and US$2.62m worth of receivables due within a year. So it actually has US$114.0m more liquid assets than total liabilities.
This surplus strongly suggests that Syros Pharmaceuticals has a rock-solid balance sheet (and the debt is of no concern whatsoever). Having regard to this fact, we think its balance sheet is as strong as an ox. Simply put, the fact that Syros Pharmaceuticals 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 Syros Pharmaceuticals'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 Syros Pharmaceuticals wasn't profitable at an EBIT level, but managed to grow its revenue by 349%, to US$18m. When it comes to revenue growth, that's like nailing the game winning 3-pointer!
So How Risky Is Syros Pharmaceuticals?
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 Syros Pharmaceuticals 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$81m and booked a US$81m accounting loss. However, it has net cash of US$182.4m, so it has a bit of time before it will need more capital. The good news for shareholders is that Syros Pharmaceuticals has dazzling revenue growth, so there's a very good chance it can boost its free cash flow in the years to come. High growth pre-profit companies may well be risky, but they can also offer great rewards. There's no doubt that we learn most about debt from the balance sheet. However, not all investment risk resides within the balance sheet - far from it. We've identified 3 warning signs with Syros Pharmaceuticals , 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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Syros Pharmaceuticals, Inc., a biopharmaceutical company, focuses on the development of treatments for cancer and monogenic diseases, and building a pipeline of gene control medicines.
Excellent balance sheet and fair value.