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 seems the smart money knows that debt – which is usually involved in bankruptcies – is a very important factor, when you assess how risky a company is. Importantly, Precigen, Inc. (NASDAQ:PGEN) does carry debt. But the more important question is: how much risk is that debt creating?

Why Does Debt Bring Risk?

Debt is a tool to help businesses grow, but if a business is incapable of paying off its lenders, then it exists at their mercy. 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.

How Much Debt Does Precigen Carry?

You can click the graphic below for the historical numbers, but it shows that Precigen had US$180.2m of debt in September 2021, down from US$194.2m, one year before. However, because it has a cash reserve of US$114.4m, its net debt is less, at about US$65.8m.

How Healthy Is Precigen’s Balance Sheet?

According to the last reported balance sheet, Precigen had liabilities of US$29.0m due within 12 months, and liabilities of US$216.7m due beyond 12 months. On the other hand, it had cash of US$114.4m and US$21.1m worth of receivables due within a year. So it has liabilities totalling US$110.2m more than its cash and near-term receivables, combined.

Of course, Precigen has a market capitalization of US$789.7m, so these liabilities are probably manageable. But there are sufficient liabilities that we would certainly recommend shareholders continue to monitor the balance sheet, going forward. When analysing debt levels, the balance sheet is the obvious place to start. But ultimately the future profitability of the business will decide if Precigen can strengthen its balance sheet over time.

Over 12 months, Precigen saw its revenue hold pretty steady, and it did not report positive earnings before interest and tax. While that’s not too bad, we’d prefer see growth.

Caveat Emptor

Over the last twelve months Precigen produced an earnings before interest and tax (EBIT) loss. Indeed, it lost a very considerable US$94m at the EBIT level. When we look at that and recall the liabilities on its balance sheet, relative to cash, it seems unwise to us for the company to have any debt. Quite frankly we think the balance sheet is far from match-fit, although it could be improved with time. However, it doesn’t help that it burned through US$64m of cash over the last year. So in short it’s a really risky stock. The balance sheet is clearly the area to focus on when you are analysing debt.