Some say volatility, rather than debt, is the best way to think about risk as an investor, but Warren Buffett famously said that 'Volatility is far from synonymous with risk.' 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, Twist Bioscience Corporation (NASDAQ:TWST) does carry debt. But the real question is whether this debt is making the company risky.
When Is Debt A Problem?
Generally speaking, debt only becomes a real problem when a company can't easily pay it off, either by raising capital or with its own cash flow. 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. Having said that, the most common situation is where a company manages its debt reasonably well - and to its own advantage. The first step when considering a company's debt levels is to consider its cash and debt together.
How Much Debt Does Twist Bioscience Carry?
The image below, which you can click on for greater detail, shows that Twist Bioscience had debt of US$3.17m at the end of March 2021, a reduction from US$6.26m over a year. However, its balance sheet shows it holds US$555.7m in cash, so it actually has US$552.5m net cash.
How Healthy Is Twist Bioscience's Balance Sheet?
According to the last reported balance sheet, Twist Bioscience had liabilities of US$40.4m due within 12 months, and liabilities of US$22.7m due beyond 12 months. Offsetting this, it had US$555.7m in cash and US$27.3m in receivables that were due within 12 months. So it actually has US$519.8m more liquid assets than total liabilities.
This surplus suggests that Twist Bioscience has a conservative balance sheet, and could probably eliminate its debt without much difficulty. Simply put, the fact that Twist Bioscience 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 it is future earnings, more than anything, that will determine Twist Bioscience'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 Twist Bioscience wasn't profitable at an EBIT level, but managed to grow its revenue by 72%, to US$113m. With any luck the company will be able to grow its way to profitability.
So How Risky Is Twist Bioscience?
We have no doubt that loss making companies are, in general, riskier than profitable ones. And in the last year Twist Bioscience 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$144m and booked a US$123m accounting loss. However, it has net cash of US$552.5m, so it has a bit of time before it will need more capital. Twist Bioscience's revenue growth shone bright over the last year, so it may well be in a position to turn a profit in due course. Pre-profit companies are often risky, but they can also offer great rewards. 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. Case in point: We've spotted 5 warning signs for Twist Bioscience you should be aware of, and 1 of them is a bit unpleasant.
When all is said and done, sometimes its easier to focus on companies that don't even need debt. Readers can access a list of growth stocks with zero net debt 100% free, right now.
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What are the risks and opportunities for Twist Bioscience?
Revenue is forecast to grow 24.1% per year
Shareholders have been diluted in the past year
Volatile share price over the past 3 months
Currently unprofitable and not forecast to become profitable over the next 3 years
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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