David Eben put it well when he said: “Volatility is not a risk we care about. What we are concerned with is avoiding permanent loss of capital. It is only natural to look at a company’s balance sheet when examining how risky it is, since debt is often involved when a company goes down. As It is the case with many other companies Fulgent Genetics, Inc. (Nasdaq: FLGT) benefit from debt. But should shareholders worry about his use of debt?
What risks does debt bring?
Debt is a tool to help businesses grow, but if the company is unable to repay the loans to the lenders, it is at their mercy. If things really go wrong, lenders can take over the business. However, the more frequent (but still costly) occurrence is where a company must issue shares at bargain low prices, permanently weakening shareholders, just to prop up its balance sheet. By replacing dilution, debt can be a very good tool for companies that need capital to invest in growth at high rates of return. When we examine debt levels, we first consider both cash and debt levels.
How much debt does genetics carry?
The image below, which you can click on for more details, shows that in March 2022 Fulgent Genetics had $21.1 million in debt, compared to $15.0 million in one year. But on the other hand, she also has $585.1 million in cash, resulting in a net cash position of $564.0 million.
A look at the full inheritance responsibilities
According to the last reported balance sheet, Fulgent Genetics had liabilities of $141.7 million maturing within 12 months, and liabilities of $10.9 million maturing 12 months. On the other hand, it had $585.1 million in cash and $164.9 million in accounts receivable within a year. So she actually has $597.4 million more Liquid assets out of total liabilities.
This surplus strongly suggests that Fulgent Genetics has a solid balance sheet (and debt is not a concern at all). With this in mind, one can assume that its balance sheet means the company is able to handle some adversity. Simply put, the fact that Fulgent Genetics has more cash than debt is arguably a good indication that it can manage its debt safely.
We also warmly note that Fulgent Genetics increased its EBIT by 10% last year, making its debt burden easier to deal with. There is no doubt that we learn more about debt from the balance sheet. But in the end, the company’s future profitability will decide whether Fulgent Genetics can boost its balance sheet over time. So if you want to see what the professionals think, you might find This free report on analyst earnings forecasts to be interesting.
Finally, the company needs free cash flow to pay off debt; Accounting profits just don’t cut it. Fulgent Genetics may have net cash on the balance sheet, but it’s still interesting to consider how well a company can convert its earnings before interest and taxes (EBIT) into free cash flow, because that will affect both its need for and its ability to manage debt. Over the past two years, Fulgent Genetics has generated robust free cash flow equivalent to 68% of its EBIT, about what we’ve been expecting. This cold steady cash means he can reduce his debt when he wants to.
A summary of the above
While it’s always reasonable to investigate a company’s debt, in this case, Fulgent Genetics has $564.0 million in net cash and a good looking balance sheet. It impressed us with free cash flow of $476 million, which is 68% of its EBIT. So is Fulgent Genetics’ debt a risk? It does not seem so to us. There is no doubt that we learn more about debt from the balance sheet. But in the end, every company can have off-balance sheet risks. For example Fulgent Genetics 3 warning signs (and 1 is a little worrisome) We think you should know about it.
When all is said and done, sometimes it’s easier to focus on companies that don’t even need debt. Readers can access a file List of developing stocks with net zero debt 100% freeImmediately.
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