David Iben put it well when he said, “Volatility is not a risk we care about. What matters to us is to avoid the permanent loss of capital. ‘ So it can be obvious that you need to consider debt, when you think about how risky a given stock is because too much debt can sink a business. We can see that Surface Oncology, Inc. (NASDAQ: SURF) uses debt in its business. But the most important question is: what risk does this debt create?
What risk does debt entail?
Generally speaking, debt only becomes a real problem when a company cannot repay it easily, either by raising capital or with its own cash flow. An integral part of capitalism is the process of “creative destruction” where bankrupt companies are ruthlessly liquidated by their bankers. However, a more common (but still costly) situation is where a company has to dilute its shareholders at a cheap share price just to get its debt under control. Of course, many companies use debt to finance their growth without negative consequences. The first step in examining a company’s debt levels is to consider its cash flow and debt together.
Check out our latest analysis for surface oncology
What is the debt of surface oncology?
As you can see below, Surface Oncology was in debt of $ 14.2 million, as of September 2021, which is roughly the same as the year before. You can click on the graph for more details. But it also has $ 149.7 million in cash to make up for that, which means it has $ 135.5 million in net cash.
How strong is the track record for surface oncology?
We can see from the most recent balance sheet that Surface Oncology had debts of US $ 15.8 million due within one year and debts of US $ 41.6 million due. beyond. In return, he had $ 149.7 million in cash and $ 2.57 million in receivables due within 12 months. So he actually has $ 94.9 million Following liquid assets as total liabilities.
This surplus strongly suggests that surface oncology has a rock solid balance sheet (and debt is no cause for concern). Given this fact, we believe its track record is as strong as an ox. Put simply, the fact that Surface Oncology has more money than debt is arguably a good indication that it can handle debt safely.
It was also good to see that despite losing money on the EBIT line last year, Surface Oncology has been a game-changer in the past 12 months, with EBIT of US $ 17 million. The balance sheet is clearly the area you need to focus on when analyzing debt. But ultimately, the company’s future profitability will decide whether surface oncology can strengthen its bottom line over time. So if you are focused on the future you can check this out free report showing analysts’ earnings forecasts.
Finally, while the IRS may love accounting profits, lenders only accept hard cash. While Surface Oncology has net cash on its balance sheet, it’s still worth looking at its ability to convert earnings before interest and taxes (EBIT) into free cash flow, to help us understand how fast it’s building ( or erodes) that cash. balance. Over the past year, Surface Oncology has actually generated more free cash flow than EBIT. This kind of cash conversion makes us as excited as the crowd when the pace drops at a Daft Punk concert.
While we sympathize with investors who find debt worrying, you should keep in mind that Surface Oncology has $ 135.5 million in net cash, plus more liquid assets than liabilities. The icing on the cake was that he converted 156% of that EBIT into free cash flow, bringing in US $ 26 million. So is Surface Oncology debt a risk? It does not seem to us. When analyzing debt levels, the balance sheet is the obvious starting point. But at the end of the day, every business can contain risks that exist off the balance sheet. To this end, you should inquire about the 2 warning signs we spotted with Surface Oncology (including 1 which is potentially serious).
If you are interested in investing in companies that can generate profits without the burden of debt, check out this page. free list of growing companies that have net cash on the balance sheet.
This Simply Wall St article is general in nature. We provide commentary based on historical data and analyst forecasts using only unbiased methodology and our articles are not intended to be financial advice. It does not constitute a recommendation to buy or sell shares and does not take into account your goals or your financial situation. Our aim is to bring you long-term, targeted analysis based on fundamental data. Note that our analysis may not take into account the latest announcements from price sensitive companies or qualitative documents. Simply Wall St has no position in any of the stocks mentioned.
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