The external fund manager backed by Berkshire Hathaway's Charlie Munger, Li Lu, makes no bones about it when he says 'The biggest investment risk is not the volatility of prices, but whether you will suffer a permanent loss of capital.' It's only natural to consider a company's balance sheet when you examine how risky it is, since debt is often involved when a business collapses. Importantly, Pluristem Therapeutics Inc. (NASDAQ:PSTI) does carry debt. But the more important question is: how much risk is that debt creating?
Why Does Debt Bring Risk?
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. If things get really bad, the lenders can take control of the business. 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, the upside of debt is that it often represents cheap capital, especially when it replaces dilution in a company with the ability to reinvest at high rates of return. The first step when considering a company's debt levels is to consider its cash and debt together.
What Is Pluristem Therapeutics's Net Debt?
You can click the graphic below for the historical numbers, but it shows that as of June 2021 Pluristem Therapeutics had US$23.9m of debt, an increase on none, over one year. But on the other hand it also has US$65.0m in cash, leading to a US$41.1m net cash position.
How Strong Is Pluristem Therapeutics' Balance Sheet?
According to the last reported balance sheet, Pluristem Therapeutics had liabilities of US$11.5m due within 12 months, and liabilities of US$24.9m due beyond 12 months. Offsetting this, it had US$65.0m in cash and US$1.49m in receivables that were due within 12 months. So it can boast US$30.1m more liquid assets than total liabilities.
This luscious liquidity implies that Pluristem Therapeutics' balance sheet is sturdy like a giant sequoia tree. With this in mind one could posit that its balance sheet means the company is able to handle some adversity. Simply put, the fact that Pluristem Therapeutics has more cash than debt is arguably a good indication that it can manage its debt safely. There's no doubt that we learn most about debt from the balance sheet. But ultimately the future profitability of the business will decide if Pluristem Therapeutics can strengthen its balance sheet over time. So if you're focused on the future you can check out this free report showing analyst profit forecasts.
Since Pluristem Therapeutics doesn't have significant operating revenue, shareholders may be hoping it comes up with a great new product, before it runs out of money.
So How Risky Is Pluristem Therapeutics?
By their very nature companies that are losing money are more risky than those with a long history of profitability. And the fact is that over the last twelve months Pluristem Therapeutics lost money at the earnings before interest and tax (EBIT) line. Indeed, in that time it burnt through US$31m of cash and made a loss of US$50m. With only US$41.1m on the balance sheet, it would appear that its going to need to raise capital again soon. Even though its balance sheet seems sufficiently liquid, debt always makes us a little nervous if a company doesn't produce free cash flow regularly. The balance sheet is clearly the area to focus on when you are analysing debt. However, not all investment risk resides within the balance sheet - far from it. Case in point: We've spotted 5 warning signs for Pluristem Therapeutics you should be aware of, and 1 of them makes us a bit uncomfortable.
If, after all that, you're more interested in a fast growing company with a rock-solid balance sheet, then check out our list of net cash growth stocks without delay.
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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