Warren Buffett famously said, ‘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 Sutro Biopharma, Inc. (NASDAQ:STRO) makes use of debt. But is this debt a concern to shareholders?
When Is Debt A Problem?
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. If things get really bad, the lenders can take control of the business. 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. By replacing dilution, though, debt can be an extremely good tool for businesses that need capital to invest in growth at high rates of return. The first thing to do when considering how much debt a business uses is to look at its cash and debt together.
What Is Sutro Biopharma’s Debt?
As you can see below, Sutro Biopharma had US$25.1m of debt, at December 2021, which is about the same as the year before. You can click the chart for greater detail. But it also has US$197.9m in cash to offset that, meaning it has US$172.8m net cash.
A Look At Sutro Biopharma’s Liabilities
We can see from the most recent balance sheet that Sutro Biopharma had liabilities of US$41.7m falling due within a year, and liabilities of US$47.1m due beyond that. Offsetting these obligations, it had cash of US$197.9m as well as receivables valued at US$12.5m due within 12 months. So it actually has US$121.5m more liquid assets than total liabilities.
This surplus liquidity suggests that Sutro Biopharma’s balance sheet could take a hit just as well as Homer Simpson’s head can take a punch. With this in mind one could posit that its balance sheet means the company is able to handle some adversity. Simply put, the fact that Sutro Biopharma has more cash than debt is arguably a good indication that it can manage its debt safely. The balance sheet is clearly the area to focus on when you are analysing debt. But ultimately the future profitability of the business will decide if Sutro Biopharma can strengthen its balance sheet over time.
In the last year Sutro Biopharma wasn’t profitable at an EBIT level, but managed to grow its revenue by 45%, to US$62m. Shareholders probably have their fingers crossed that it can grow its way to profits.
So How Risky Is Sutro Biopharma?
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 Sutro Biopharma 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$106m accounting loss. However, it has net cash of US$172.8m, so it has a bit of time before it will need more capital. With very solid revenue growth in the last year, Sutro Biopharma may be on a path to profitability. Pre-profit companies are often risky, but they can also offer great rewards.