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Is Allogene Therapeutics (NASDAQ:ALLO) Using Too Much Debt?

·4-min read

The external fund manager backed by Berkshire Hathaway's Charlie Munger, Li Lu, makes no bones about it when he says 'The biggest investment risk is not the volatility of prices, but whether you will suffer a permanent loss of capital.' 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, Allogene Therapeutics, Inc. (NASDAQ:ALLO) does carry debt. But should shareholders be worried about its use of debt?

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. 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. 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. The first thing to do when considering how much debt a business uses is to look at its cash and debt together.

See our latest analysis for Allogene Therapeutics

What Is Allogene Therapeutics's Net Debt?

The image below, which you can click on for greater detail, shows that at March 2022 Allogene Therapeutics had debt of US$72.6m, up from none in one year. But on the other hand it also has US$449.1m in cash, leading to a US$376.4m net cash position.

debt-equity-history-analysis
debt-equity-history-analysis

A Look At Allogene Therapeutics' Liabilities

Zooming in on the latest balance sheet data, we can see that Allogene Therapeutics had liabilities of US$36.9m due within 12 months and liabilities of US$72.5m due beyond that. Offsetting these obligations, it had cash of US$449.1m as well as receivables valued at US$11.3m due within 12 months. So it actually has US$350.9m more liquid assets than total liabilities.

This surplus suggests that Allogene Therapeutics has a conservative balance sheet, and could probably eliminate its debt without much difficulty. Succinctly put, Allogene Therapeutics 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 ultimately the future profitability of the business will decide if Allogene Therapeutics can strengthen its balance sheet over time. 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, Allogene Therapeutics shareholders no doubt hope it can fund itself until it has a profitable product.

So How Risky Is Allogene Therapeutics?

We have no doubt that loss making companies are, in general, riskier than profitable ones. And the fact is that over the last twelve months Allogene Therapeutics lost money at the earnings before interest and tax (EBIT) line. And over the same period it saw negative free cash outflow of US$221m and booked a US$308m accounting loss. But at least it has US$376.4m on the balance sheet to spend on growth, near-term. Even though its balance sheet seems sufficiently liquid, debt always makes us a little nervous if a company doesn't produce free cash flow regularly. There's no doubt that we learn most about debt from the balance sheet. However, not all investment risk resides within the balance sheet - far from it. Case in point: We've spotted 3 warning signs for Allogene Therapeutics you should be aware of, and 1 of them doesn't sit too well with us.

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.

Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team (at) simplywallst.com.

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.

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