- Oops!Something went wrong.Please try again later.
Legendary fund manager Li Lu (who Charlie Munger backed) once said, 'The biggest investment risk is not the volatility of prices, but whether you will suffer a permanent loss of capital.' 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. Importantly, Orchard Therapeutics plc (NASDAQ:ORTX) does carry debt. But the real question is whether this debt is making the company risky.
When Is Debt A Problem?
Debt assists a business until the business has trouble paying it off, either with new capital or with free cash flow. In the worst case scenario, 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 capital at a low price, thus permanently diluting shareholders. 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. When we think about a company's use of debt, we first look at cash and debt together.
What Is Orchard Therapeutics's Debt?
As you can see below, at the end of September 2021, Orchard Therapeutics had US$32.8m of debt, up from US$25.0m a year ago. Click the image for more detail. However, its balance sheet shows it holds US$254.1m in cash, so it actually has US$221.4m net cash.
How Healthy Is Orchard Therapeutics' Balance Sheet?
The latest balance sheet data shows that Orchard Therapeutics had liabilities of US$44.2m due within a year, and liabilities of US$70.1m falling due after that. On the other hand, it had cash of US$254.1m and US$19.4m worth of receivables due within a year. So it actually has US$159.1m more liquid assets than total liabilities.
This excess liquidity is a great indication that Orchard Therapeutics' balance sheet is almost as strong as Fort Knox. On this view, lenders should feel as safe as the beloved of a black-belt karate master. Simply put, the fact that Orchard Therapeutics has more cash than debt is arguably a good indication that it can manage its debt safely. When analysing debt levels, the balance sheet is the obvious place to start. But it is future earnings, more than anything, that will determine Orchard Therapeutics's ability to maintain a healthy balance sheet going forward. So if you're focused on the future you can check out this free report showing analyst profit forecasts.
Over 12 months, Orchard Therapeutics made a loss at the EBIT level, and saw its revenue drop to US$1.2m, which is a fall of 63%. That makes us nervous, to say the least.
So How Risky Is Orchard Therapeutics?
By their very nature companies that are losing money are more risky than those with a long history of profitability. And we do note that Orchard Therapeutics 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$115m and booked a US$142m accounting loss. However, it has net cash of US$221.4m, so it has a bit of time before it will need more capital. 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. The balance sheet is clearly the area to focus on when you are analysing debt. But ultimately, every company can contain risks that exist outside of the balance sheet. These risks can be hard to spot. Every company has them, and we've spotted 4 warning signs for Orchard Therapeutics you should know about.
Of course, if you're the type of investor who prefers buying stocks without the burden of debt, then don't hesitate to discover our exclusive list of net cash growth stocks, today.
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.
Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team (at) simplywallst.com.