David Iben said it well when he said: “Volatility is not a risk that interests us. What matters to us is to avoid the permanent loss of capital. It’s natural to consider a company’s balance sheet when looking at its riskiness, as debt is often involved when a company fails. Like many other companies Fulgent Genetics, Inc. (NASDAQ:FLGT) uses debt. But should shareholders worry about its use of debt?
What risk does debt carry?
Debt is a tool to help businesses grow, but if a business is unable to repay its lenders, it exists at their mercy. If things go really bad, lenders can take over the business. However, a more frequent (but still costly) event is when a company has to issue shares at bargain prices, permanently diluting shareholders, just to shore up its balance sheet. By replacing dilution, however, debt can be a great tool for companies that need capital to invest in growth at high rates of return. When we look at debt levels, we first consider cash and debt levels, together.
See our latest review for Fulgent Genetics
How much debt does Fulgent Genetics have?
The image below, which you can click on for more details, shows that as of March 2022, Fulgent Genetics had $21.1 million in debt, up from $15.0 million in one year. But on the other hand, it also has $585.1 million in cash, resulting in a net cash position of $564.0 million.
A Look at Fulgent Genetics’ Responsibilities
According to the last published balance sheet, Fulgent Genetics had liabilities of US$141.7 million due within 12 months and liabilities of US$10.9 million due beyond 12 months. On the other hand, it had a cash position of 585.1 million dollars and 164.9 million dollars of receivables at less than one year. So he actually has US$597.4 million After liquid assets than total liabilities.
This surplus strongly suggests that Fulgent Genetics has a rock-solid balance sheet (and debt is nothing to worry about). With that in mind, one could argue that its track record means the company is capable of dealing with some adversity. Simply put, the fact that Fulgent Genetics has more money than debt is probably a good indication that it can safely manage its debt.
And we also warmly note that Fulgent Genetics increased its EBIT by 10% last year, making its leverage more manageable. There is no doubt that we learn the most about debt from the balance sheet. But ultimately, the company’s future profitability will decide whether Fulgent Genetics can strengthen its balance sheet over time. So if you want to see what the professionals think, you might find this free analyst earnings forecast report interesting.
Finally, a business needs free cash flow to pay off its debts; book profits are not enough. Fulgent Genetics may have net cash on the balance sheet, but it is always interesting to see how well the company converts its earnings before interest and taxes (EBIT) into free cash flow, as this will influence both its needs and its capacity. . to manage debt. Over the past two years, Fulgent Genetics has produced strong free cash flow equivalent to 68% of its EBIT, which is what we expected. This cold hard cash allows him to reduce his debt whenever he wants.
While it’s always a good idea to investigate a company’s debt, in this case Fulgent Genetics has $564.0 million in net cash and a decent balance sheet. And it impressed us with free cash flow of $476 million, or 68% of its EBIT. So is Fulgent Genetics’ debt a risk? This does not seem to us to be the case. There is no doubt that we learn the most about debt from the balance sheet. But at the end of the day, every business can contain risks that exist outside of the balance sheet. For example, Fulgent Genetics has 3 warning signs (and 1 which is a little worrying) that we think you should know about.
In the end, sometimes it’s easier to focus on companies that don’t even need to take on debt. Readers can access a list of growth stocks with no net debt 100% freeat present.
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This Simply Wall St article is general in nature. We provide commentary based on historical data and analyst forecasts only using unbiased methodology and our articles are not intended to be financial advice. It is not a recommendation to buy or sell stocks and does not take into account your objectives or financial situation. Our goal is to bring you targeted long-term analysis based on fundamental data. Note that our analysis may not take into account the latest announcements from price-sensitive companies or qualitative materials. Simply Wall St has no position in the stocks mentioned.