Howard Marks put it nicely when he said that, rather than worrying about share price volatility, 'The possibility of permanent loss is the risk I worry about... and every practical investor I know worries about.' 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 can see that Standard BioTools Inc. (NASDAQ:LAB) does use debt in its business. But is this debt a concern to shareholders?
What Risk Does Debt Bring?
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. In the worst case scenario, a company can go bankrupt if it cannot pay its creditors. 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. Of course, debt can be an important tool in businesses, particularly capital heavy businesses. When we think about a company's use of debt, we first look at cash and debt together.
What Is Standard BioTools's Net Debt?
You can click the graphic below for the historical numbers, but it shows that as of June 2022 Standard BioTools had US$64.5m of debt, an increase on US$53.9m, over one year. However, its balance sheet shows it holds US$211.2m in cash, so it actually has US$146.7m net cash.
How Strong Is Standard BioTools' Balance Sheet?
Zooming in on the latest balance sheet data, we can see that Standard BioTools had liabilities of US$42.8m due within 12 months and liabilities of US$124.6m due beyond that. On the other hand, it had cash of US$211.2m and US$10.9m worth of receivables due within a year. So it can boast US$54.8m more liquid assets than total liabilities.
This surplus strongly suggests that Standard BioTools has a rock-solid balance sheet (and the debt is of no concern whatsoever). On this view, lenders should feel as safe as the beloved of a black-belt karate master. Succinctly put, Standard BioTools boasts net cash, so it's fair to say it does not have a heavy debt load! The balance sheet is clearly the area to focus on when you are analysing debt. But you can't view debt in total isolation; since Standard BioTools will need earnings to service that debt. So when considering debt, it's definitely worth looking at the earnings trend. Click here for an interactive snapshot.
In the last year Standard BioTools had a loss before interest and tax, and actually shrunk its revenue by 24%, to US$112m. To be frank that doesn't bode well.
So How Risky Is Standard BioTools?
Statistically speaking companies that lose money are riskier than those that make money. And we do note that Standard BioTools 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$66m and booked a US$163m accounting loss. But at least it has US$146.7m on the balance sheet to spend on growth, near-term. Overall, its balance sheet doesn't seem overly risky, at the moment, but we're always cautious until we see the positive free cash flow. When analysing debt levels, the balance sheet is the obvious place to start. But ultimately, every company can contain risks that exist outside of the balance sheet. We've identified 3 warning signs with Standard BioTools (at least 2 which are a bit unpleasant) , and understanding them should be part of your investment process.
At the end of the day, it's often better to focus on companies that are free from net debt. You can access our special list of such companies (all with a track record of profit growth). It's free.
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This article by Simply Wall St is general in nature. We provide commentary based on historical data and analyst forecasts only using an 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 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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