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 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. We note that Pliant Therapeutics, Inc. (NASDAQ:PLRX) does have debt on its balance sheet. But is this debt a concern to shareholders?
When Is Debt A Problem?
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 common (but still painful) scenario is that it has to raise new equity capital at a low price, thus permanently diluting shareholders. Having said that, the most common situation is where a company manages its debt reasonably well - and to its own advantage. The first step when considering a company's debt levels is to consider its cash and debt together.
How Much Debt Does Pliant Therapeutics Carry?
The chart below, which you can click on for greater detail, shows that Pliant Therapeutics had US$10.1m in debt in December 2023; about the same as the year before. However, it does have US$494.2m in cash offsetting this, leading to net cash of US$484.2m.
A Look At Pliant Therapeutics' Liabilities
According to the last reported balance sheet, Pliant Therapeutics had liabilities of US$28.5m due within 12 months, and liabilities of US$10.1m due beyond 12 months. Offsetting these obligations, it had cash of US$494.2m as well as receivables valued at US$3.00m due within 12 months. So it actually has US$458.7m more liquid assets than total liabilities.
This excess liquidity is a great indication that Pliant Therapeutics' balance sheet is almost as strong as Fort Knox. On this view, lenders should feel as safe as the beloved of a black-belt karate master. Simply put, the fact that Pliant Therapeutics has more cash than debt is arguably a good indication that it can manage its debt safely. When analysing debt levels, the balance sheet is the obvious place to start. But it is future earnings, more than anything, that will determine Pliant Therapeutics'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.
Over 12 months, Pliant Therapeutics made a loss at the EBIT level, and saw its revenue drop to US$1.6m, which is a fall of 84%. To be frank that doesn't bode well.
So How Risky Is Pliant Therapeutics?
Statistically speaking companies that lose money are riskier than those that make money. And in the last year Pliant Therapeutics had an earnings before interest and tax (EBIT) loss, truth be told. Indeed, in that time it burnt through US$117m of cash and made a loss of US$161m. While this does make the company a bit risky, it's important to remember it has net cash of US$484.2m. That means it could keep spending at its current rate for more than two years. 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. 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. For example, we've discovered 4 warning signs for Pliant Therapeutics (1 shouldn't be ignored!) that you should be aware of before investing here.
Of course, if you're the type of investor who prefers buying stocks without the burden of debt, then don't hesitate to discover our exclusive list of net cash growth stocks, today.
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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.