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. Importantly, 89bio, Inc. (NASDAQ:ETNB) does carry debt. But should shareholders be worried about its use of debt?
What Risk Does Debt Bring?
Debt assists a business until the business has trouble paying it off, either with new capital or with free cash flow. If things get really bad, the lenders can take control of the business. However, a more usual (but still expensive) situation is where a company must dilute shareholders at a cheap share price simply to get debt under control. 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.
How Much Debt Does 89bio Carry?
The chart below, which you can click on for greater detail, shows that 89bio had US$25.1m in debt in June 2024; about the same as the year before. However, it does have US$531.4m in cash offsetting this, leading to net cash of US$506.3m.
A Look At 89bio's Liabilities
We can see from the most recent balance sheet that 89bio had liabilities of US$41.7m falling due within a year, and liabilities of US$25.6m due beyond that. On the other hand, it had cash of US$531.4m and US$19.4m worth of receivables due within a year. So it actually has US$483.6m more liquid assets than total liabilities.
This excess liquidity is a great indication that 89bio's balance sheet is almost as strong as Fort Knox. With this in mind one could posit that its balance sheet means the company is able to handle some adversity. Succinctly put, 89bio boasts net cash, so it's fair to say it does not have a heavy debt load! When analysing debt levels, the balance sheet is the obvious place to start. But it is future earnings, more than anything, that will determine 89bio's ability to maintain a healthy balance sheet going forward. So if you're focused on the future you can check out this free report showing analyst profit forecasts.
Given its lack of meaningful operating revenue, 89bio shareholders no doubt hope it can fund itself until it has a profitable product.
So How Risky Is 89bio?
We have no doubt that loss making companies are, in general, riskier than profitable ones. And in the last year 89bio 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$166m and booked a US$175m accounting loss. While this does make the company a bit risky, it's important to remember it has net cash of US$506.3m. That kitty means the company can keep spending for growth for at least two years, at current rates. Overall, its balance sheet doesn't seem overly risky, at the moment, but we're always cautious until we see the positive free cash flow. The balance sheet is clearly the area to focus on when you are analysing debt. However, not all investment risk resides within the balance sheet - far from it. Be aware that 89bio is showing 3 warning signs in our investment analysis , and 1 of those is a bit concerning...
When all is said and done, sometimes its easier to focus on companies that don't even need debt. Readers can access a list of growth stocks with zero net debt 100% free, right now.
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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.