Some say volatility, rather than debt, is the best way to think about risk as an investor, but Warren Buffett said “volatility is far from synonymous with risk.” It’s natural to consider a company’s balance sheet when looking at its riskiness, as debt is often involved when a company fails. We can see that FibroGen, Inc. (NASDAQ:FGEN) uses debt in its business. But should shareholders worry about its use of debt?
What risk does debt carry?
Generally speaking, debt only becomes a real problem when a company cannot easily repay it, either by raising capital or with its own cash flow. In the worst case, a company can go bankrupt if it cannot pay its creditors. However, a more common (but still painful) scenario is that it has to raise new equity at a low price, thereby permanently diluting shareholders. By replacing dilution, however, debt can be a great tool for companies that need capital to invest in growth at high rates of return. The first thing to do when considering how much debt a business has is to look at its cash flow and debt together.
What is FibroGen’s debt?
The graph below, which you can click on for more details, shows that FibroGen had a debt of US$17.9 million in September 2021; about the same as the previous year. However, his balance sheet shows he holds $486.4 million in cash, so he actually has $468.5 million in net cash.
A look at FibroGen’s responsibilities
Zooming in on the latest balance sheet data, we can see that FibroGen had liabilities of US$209.3 million due within 12 months and liabilities of US$296.1 million due beyond. In compensation for these obligations, it had cash of US$486.4 million as well as receivables valued at US$44.0 million and maturing within 12 months. He can therefore boast of having $24.9 million more in cash than total Passives.
Considering the size of FibroGen, it appears that its cash is well balanced with its total liabilities. So it’s highly unlikely that the US$1.45 billion company will run out of cash, but it’s still worth keeping an eye on the balance sheet. In summary, FibroGen has clean cash, so it’s fair to say that it doesn’t have heavy debt! When analyzing debt levels, the balance sheet is the obvious starting point. But it is future earnings, more than anything, that will determine FibroGen’s ability to maintain a healthy balance sheet in the future. So if you are focused on the future, you can check out this free report showing analyst earnings forecast.
Last year, FibroGen was not profitable in terms of EBIT, but managed to increase its turnover by 138%, to 284 million dollars. Its fairly obvious shareholders therefore hope for more growth!
So how risky is FibroGen?
By their very nature, companies that lose money are riskier than those with a long history of profitability. And over the past year, FibroGen has had a loss in earnings before interest and taxes (EBIT), if truth be told. And during the same period, it recorded a negative free cash outflow of US$66 million and recorded a book loss of US$215 million. But the saving grace is the US$468.5 million on the balance sheet. This pot means that the company can continue to spend on growth for at least two years, at current rates. Importantly, revenue growth for FibroGen is imminent. While unprofitable businesses can be risky, they can also grow strongly and quickly in those pre-profit years. There is no doubt that we learn the most about debt from the balance sheet. But at the end of the day, every business can contain risks that exist outside of the balance sheet. These risks can be difficult to spot. Every business has them, and we’ve spotted 1 warning sign for FibroGen you should know.
In the end, sometimes it’s easier to focus on companies that don’t even need to take on debt. Readers can access a list of growth stocks with no net debt 100% freeat present.
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