Howard Marks put it well when he said that, rather than worrying about stock price volatility, “The possibility of permanent loss is the risk that worries me … and every investor practices that I know worries “. It is only natural to consider a company’s balance sheet when looking at its level of risk, as debt is often involved when a business collapses. We notice that PolarityTE, Inc. (NASDAQ: PTE) has debt on its balance sheet. But should shareholders be concerned about its use of debt?
Why Does Debt Bring Risk?
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) event is when a company has to issue stock at bargain prices, constantly diluting shareholders, just to strengthen its balance sheet. Of course, debt can be an important tool in businesses, especially capital intensive businesses. When we look at debt levels, we first consider both liquidity and debt levels.
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What is PolarityTE’s net debt?
As you can see below, at the end of March 2021, PolarityTE was in debt of $ 4.62 million, up from 536.0ka a year ago. Click on the image for more details. However, it has US $ 37.2 million in cash offsetting this, which leads to net cash of US $ 32.6 million.
How strong is PolarityTE’s balance sheet?
Zooming in on the latest balance sheet data, we can see that PolarityTE had a liability of US $ 10.0 million owed within 12 months and a liability of US $ 18.7 million owed beyond that. In compensation for these obligations, he had cash of US $ 37.2 million as well as receivables valued at US $ 4.32 million due within 12 months. He can therefore claim $ 12.8 million in liquid assets more than total Liabilities.
This excess suggests that PolarityTE is using debt in a way that seems both safe and prudent. Given that he has easily sufficient short-term liquidity, we don’t think he will have any problems with his lenders. Put simply, the fact that PolarityTE has more cash than debt is arguably a good indication that it can safely manage its debt. The balance sheet is clearly the area you need to focus on when analyzing debt. But it is future profits, more than anything, that will determine PolarityTE’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 earnings forecast report interesting.
Over the past year, PolarityTE has not been profitable on EBIT level, but has managed to grow its revenue 172% to US $ 14 million. Its fairly obvious shareholders are therefore hoping for more growth!
So how risky is PolarityTE?
We are convinced that loss-making companies are, in general, riskier than profitable ones. And the point is that over the past twelve months PolarityTE has lost money on the profit before interest and tax (EBIT) line. Indeed, during that period, he spent $ 31 million in cash and recorded a loss of $ 47 million. With only $ 32.6 million on the balance sheet, it looks like it will soon have to raise capital again. The good news for shareholders is that PolarityTE is having 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. While unprofitable businesses can be risky, they can also grow quickly and rapidly during those pre-profit years. The balance sheet is clearly the area you need to focus on when analyzing debt. But at the end of the day, every business can contain risks that exist off the balance sheet. For example PolarityTE has 6 warning signs (and 3 that are a bit rude) you should know about.
If you are interested in investing in companies that can generate profits without the burden of debt, check out this page free list of growing companies that have net cash on the balance sheet.
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This Simply Wall St article is general in nature. It does not constitute a recommendation to buy or sell shares 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.
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