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.’ So it might be obvious that you need to consider debt, when you think about how risky any given stock is, because too much debt can sink a company. We note that Pacific Biosciences of California, Inc. (NASDAQ:PACB) does have debt on its balance sheet. But the more important question is: how much risk is that debt creating?
Why Does Debt Bring Risk?
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 frequent (but still costly) occurrence is where a company must issue shares at bargain-basement prices, permanently diluting shareholders, just to shore up its balance sheet. Having said that, the most common situation is where a company manages its debt reasonably well – and to its own advantage. When we examine debt levels, we first consider both cash and debt levels, together.
What Is Pacific Biosciences of California’s Debt?
As you can see below, at the end of September 2021, Pacific Biosciences of California had US$895.9m of debt, up from none a year ago. Click the image for more detail. But it also has US$1.08b in cash to offset that, meaning it has US$184.0m net cash.
How Healthy Is Pacific Biosciences of California’s Balance Sheet?
Zooming in on the latest balance sheet data, we can see that Pacific Biosciences of California had liabilities of US$55.6m due within 12 months and liabilities of US$1.14b due beyond that. Offsetting this, it had US$1.08b in cash and US$23.9m in receivables that were due within 12 months. So its liabilities outweigh the sum of its cash and (near-term) receivables by US$89.5m.
Having regard to Pacific Biosciences of California’s size, it seems that its liquid assets are well balanced with its total liabilities. So while it’s hard to imagine that the US$5.16b company is struggling for cash, we still think it’s worth monitoring its balance sheet. Despite its noteworthy liabilities, Pacific Biosciences of California boasts net cash, so it’s fair to say it does not have a heavy debt load! There’s no doubt that we learn most about debt from the balance sheet. But it is future earnings, more than anything, that will determine Pacific Biosciences of California’s ability to maintain a healthy balance sheet going forward.
In the last year Pacific Biosciences of California wasn’t profitable at an EBIT level, but managed to grow its revenue by 53%, to US$122m. Shareholders probably have their fingers crossed that it can grow its way to profits.
So How Risky Is Pacific Biosciences of California?
By their very nature companies that are losing money are more risky than those with a long history of profitability. And in the last year Pacific Biosciences of California had an earnings before interest and tax (EBIT) loss, truth be told. And over the same period it saw negative free cash outflow of US$97m and booked a US$37m accounting loss. With only US$184.0m on the balance sheet, it would appear that its going to need to raise capital again soon. With very solid revenue growth in the last year, Pacific Biosciences of California may be on a path to profitability. By investing before those profits, shareholders take on more risk in the hope of bigger rewards.