Yahoo Finance Selecta Biosciences (NASDAQ:SELB) Has A Pretty Healthy Balance Sheet
Some say volatility, rather than debt, is the best way to think about risk as an investor, but Warren Buffett famously said that 'Volatility is far from synonymous with risk.' 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. As with many other companies Selecta Biosciences, Inc. (NASDAQ:SELB) makes use of debt. But the more important question is: how much risk is that debt creating?
What Risk Does Debt Bring?
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. Ultimately, if the company can't fulfill its legal obligations to repay debt, shareholders could walk away with nothing. While that is not too common, we often do see indebted companies permanently diluting shareholders because lenders force them to raise capital at a distressed price. 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 examine debt levels, we first consider both cash and debt levels, together.
See our latest analysis for Selecta Biosciences
What Is Selecta Biosciences's Net Debt?
The chart below, which you can click on for greater detail, shows that Selecta Biosciences had US$25.9m in debt in June 2022; about the same as the year before. But on the other hand it also has US$142.1m in cash, leading to a US$116.1m net cash position.
A Look At Selecta Biosciences' Liabilities
According to the last reported balance sheet, Selecta Biosciences had liabilities of US$33.8m due within 12 months, and liabilities of US$64.7m due beyond 12 months. Offsetting these obligations, it had cash of US$142.1m as well as receivables valued at US$24.0m due within 12 months. So it actually has US$67.6m more liquid assets than total liabilities.
This excess liquidity suggests that Selecta Biosciences is taking a careful approach to debt. Given it has easily adequate short term liquidity, we don't think it will have any issues with its lenders. Succinctly put, Selecta Biosciences boasts net cash, so it's fair to say it does not have a heavy debt load!
Although Selecta Biosciences made a loss at the EBIT level, last year, it was also good to see that it generated US$27m in EBIT over the last twelve months. When analysing debt levels, the balance sheet is the obvious place to start. But ultimately the future profitability of the business will decide if Selecta Biosciences 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.
Finally, a business needs free cash flow to pay off debt; accounting profits just don't cut it. While Selecta Biosciences has net cash on its balance sheet, it's still worth taking a look at its ability to convert earnings before interest and tax (EBIT) to free cash flow, to help us understand how quickly it is building (or eroding) that cash balance. Over the last year, Selecta Biosciences saw substantial negative free cash flow, in total. While that may be a result of expenditure for growth, it does make the debt far more risky.
Summing Up
While it is always sensible to investigate a company's debt, in this case Selecta Biosciences has US$116.1m in net cash and a decent-looking balance sheet. So we don't have any problem with Selecta Biosciences's use of debt. 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. To that end, you should learn about the 3 warning signs we've spotted with Selecta Biosciences (including 1 which is concerning) .
When all is said and done, sometimes its easier to focus on companies that don't even need debt. Readers can access a list of growth stocks with zero net debt 100% free, right now.
Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team (at) simplywallst.com.
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.
Join A Paid User Research Session
You’ll receive a US$30 Amazon Gift card for 1 hour of your time while helping us build better investing tools for the individual investors like yourself. Sign up here
