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 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. As with many other companies Surface Oncology, Inc. (NASDAQ:SURF) makes use of debt. But is this debt a concern to shareholders?
What Risk Does Debt Bring?
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. Part and parcel of capitalism is the process of 'creative destruction' where failed businesses are mercilessly liquidated by their bankers. However, a more frequent (but still costly) occurrence is where a company must issue shares at bargain-basement prices, permanently diluting shareholders, just to shore up its balance sheet. Of course, debt can be an important tool in businesses, particularly capital heavy businesses. 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 Surface Oncology Carry?
You can click the graphic below for the historical numbers, but it shows that as of June 2020 Surface Oncology had US$15.5m of debt, an increase on none, over one year. But it also has US$112.5m in cash to offset that, meaning it has US$97.1m net cash.
A Look At Surface Oncology's Liabilities
Zooming in on the latest balance sheet data, we can see that Surface Oncology had liabilities of US$10.6m due within 12 months and liabilities of US$46.3m due beyond that. Offsetting these obligations, it had cash of US$112.5m as well as receivables valued at US$336.0k due within 12 months. So it actually has US$56.0m more liquid assets than total liabilities.
It's good to see that Surface Oncology has plenty of liquidity on its balance sheet, suggesting conservative management of liabilities. Given it has easily adequate short term liquidity, we don't think it will have any issues with its lenders. Succinctly put, Surface Oncology 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 Surface Oncology'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.
In the last year Surface Oncology wasn't profitable at an EBIT level, but managed to grow its revenue by 51%, to US$39m. With any luck the company will be able to grow its way to profitability.
So How Risky Is Surface Oncology?
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 Surface Oncology 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$60m and booked a US$25m accounting loss. But at least it has US$97.1m on the balance sheet to spend on growth, near-term. Surface Oncology's revenue growth shone bright over the last year, so it may well be in a position to turn a profit in due course. Pre-profit companies are often risky, but they can also offer great rewards. There's no doubt that we learn most about debt from the balance sheet. But ultimately, every company can contain risks that exist outside of the balance sheet. For instance, we've identified 4 warning signs for Surface Oncology (1 doesn't sit too well with us) you should be aware of.
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.
This article by Simply Wall St is general in nature. 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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