Berkshire Hathaway’s Charlie Munger-backed external fund manager Li Lu is quick to say this when he says “The biggest risk in investing is not price volatility, but if you will suffer a loss. permanent capital “. It is only natural to consider a company’s balance sheet when considering how risky it is, as debt is often involved when a business collapses. Like many other companies FibroGen, Inc. (NASDAQ: FGEN) uses debt. But the real question is whether this debt makes the business risky.
What risk does debt entail?
Debt is a tool to help businesses grow, but if a business is unable to repay its lenders, then it exists at their mercy. If things really go wrong, lenders can take over the business. However, a more common (but still costly) situation is where a company has to dilute its shareholders at a cheap share price just to get its debt under control. By replacing dilution, however, debt can be a very good tool for companies that need capital to invest in growth at high rates of return. When we look at debt levels, we first look at cash and debt levels, together.
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What is FibroGen’s debt?
The graph below, which you can click for more details, shows that FibroGen was $ 17.9 million in debt as of September 2021; about the same as the year before. However, his balance sheet shows that he has $ 486.4 million in cash, so he actually has $ 468.5 million in net cash.
A look at the responsibilities of FibroGen
The latest balance sheet data shows that FibroGen had liabilities of US $ 209.3 million due within one year, and liabilities of US $ 296.1 million due after that. In compensation for these obligations, it had cash of US $ 486.4 million as well as receivables valued at US $ 44.0 million within 12 months. So he actually has $ 24.9 million Following liquid assets as total liabilities.
Considering the size of FibroGen, it appears that its liquid assets are well balanced with its total liabilities. So while it’s hard to imagine the US $ 1.31 billion company struggling to find liquidity, we still think it’s worth watching its balance sheet. Put simply, the fact that FibroGen has more cash than debt is arguably a good indication that it can safely manage its debt. The balance sheet is clearly the area to focus on when analyzing debt. But it is future profits, more than anything, that will determine FibroGen’s ability to maintain a healthy balance sheet in the future. So if you want to see what the professionals think, you might find this free Analyst Profit Forecast report interesting.
Last year, FibroGen was not profitable on EBIT level, but managed to increase its revenue by 138%, to US $ 284 million. Its fairly obvious shareholders are therefore hoping for more growth!
So how risky is FibroGen?
By their very nature, businesses that lose money are riskier than those with a long history of profitability. And we note that FibroGen has recorded a loss of earnings before interest and taxes (EBIT) over the past year. Indeed, during that period, he spent $ 66 million in cash and recorded a loss of $ 215 million. While this does make the company a bit risky, it’s important to remember that it has a net cash position of $ 468.5 million. This jackpot means the business can continue to spend on growth for at least two years, at current rates. The good news for shareholders is that FibroGen is experiencing tremendous revenue growth, so there is a very good chance that it will be able to increase its free cash flow in the years to come. High growth nonprofits can be risky, but they can also offer great rewards. There is no doubt that we learn the most about debt from the balance sheet. However, not all investment risks lie on the balance sheet – far from it. For example – FibroGen has 2 warning signs we think you should be aware.
At the end of the day, it’s often best to focus on businesses that don’t have net debt. You can access our special list of these companies (all with a history of profit growth). It’s free.
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This Simply Wall St article is general in nature. We provide commentary based on historical data and analyst forecasts using only 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 into account your goals or your financial situation. Our aim is to bring you long-term, targeted analysis based on fundamental data. Note that our analysis may not take into account the latest announcements from price sensitive companies or qualitative documents. Simply Wall St has no position in any of the stocks mentioned.