David Iben put it well when he said, 'Volatility is not a risk we care about. What we care about is avoiding the permanent loss of capital.' 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 Fractyl Health, Inc. (NASDAQ:GUTS) does have debt on its balance sheet. But is this debt a concern to shareholders?
Why Does Debt Bring Risk?
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. Part and parcel of capitalism is the process of 'creative destruction' where failed businesses are mercilessly liquidated by their bankers. 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. Having said that, the most common situation is where a company manages its debt reasonably well - and to its own advantage. The first thing to do when considering how much debt a business uses is to look at its cash and debt together.
What Is Fractyl Health's Net Debt?
As you can see below, at the end of March 2024, Fractyl Health had US$28.7m of debt, up from US$19.5m a year ago. Click the image for more detail. However, its balance sheet shows it holds US$121.4m in cash, so it actually has US$92.7m net cash.
How Healthy Is Fractyl Health's Balance Sheet?
According to the last reported balance sheet, Fractyl Health had liabilities of US$13.3m due within 12 months, and liabilities of US$66.1m due beyond 12 months. On the other hand, it had cash of US$121.4m and US$15.0k worth of receivables due within a year. So it actually has US$42.1m more liquid assets than total liabilities.
This surplus suggests that Fractyl Health has a conservative balance sheet, and could probably eliminate its debt without much difficulty. Succinctly put, Fractyl Health boasts net cash, so it's fair to say it does not have a heavy debt load! The balance sheet is clearly the area to focus on when you are analysing debt. But it is future earnings, more than anything, that will determine Fractyl Health's ability to maintain a healthy balance sheet going forward. So if you want to see what the professionals think, you might find this free report on analyst profit forecasts to be interesting.
Since Fractyl Health doesn't have significant operating revenue, shareholders must hope it'll ramp sales of its new medical tech as soon as possible.
So How Risky Is Fractyl Health?
Statistically speaking companies that lose money are riskier than those that make money. And the fact is that over the last twelve months Fractyl Health lost money at the earnings before interest and tax (EBIT) line. Indeed, in that time it burnt through US$43m of cash and made a loss of US$87m. While this does make the company a bit risky, it's important to remember it has net cash of US$92.7m. That kitty means the company can keep spending for growth for at least two years, at current rates. The good news for shareholders is that Fractyl Health has dazzling revenue growth, so there's a very good chance it can boost its free cash flow in the years to come. While unprofitable companies can be risky, they can also grow hard and fast in those pre-profit years. When analysing debt levels, the balance sheet is the obvious place to start. However, not all investment risk resides within the balance sheet - far from it. We've identified 4 warning signs with Fractyl Health (at least 2 which can't be ignored) , and understanding them should be part of your investment process.
At the end of the day, it's often better to focus on companies that are free from net debt. You can access our special list of such companies (all with a track record of profit growth). It's free.
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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.