Howard Marks put it nicely when he said that, rather than worrying about share price volatility, 'The possibility of permanent loss is the risk I worry about... and every practical investor I know worries about.' It's only natural to consider a company's balance sheet when you examine how risky it is, since debt is often involved when a business collapses. We can see that Twist Bioscience Corporation (NASDAQ:TWST) does use debt in its business. But the real question is whether this debt is making the company risky.
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. Ultimately, if the company can't fulfill its legal obligations to repay debt, shareholders could walk away with nothing. However, a more usual (but still expensive) situation is where a company must dilute shareholders at a cheap share price simply to get debt under control. Having said that, the most common situation is where a company manages its debt reasonably well - and to its own advantage. When we think about a company's use of debt, we first look at cash and debt together.
What Is Twist Bioscience's Debt?
The image below, which you can click on for greater detail, shows that Twist Bioscience had debt of US$2.37m at the end of June 2021, a reduction from US$5.50m over a year. But on the other hand it also has US$519.4m in cash, leading to a US$517.0m net cash position.
A Look At Twist Bioscience's Liabilities
Zooming in on the latest balance sheet data, we can see that Twist Bioscience had liabilities of US$54.8m due within 12 months and liabilities of US$60.0m due beyond that. Offsetting these obligations, it had cash of US$519.4m as well as receivables valued at US$28.1m due within 12 months. So it can boast US$432.7m more liquid assets than total liabilities.
This surplus suggests that Twist Bioscience has a conservative balance sheet, and could probably eliminate its debt without much difficulty. Simply put, the fact that Twist Bioscience has more cash than debt is arguably a good indication that it can manage its debt safely. The balance sheet is clearly the area to focus on when you are analysing debt. But it is future earnings, more than anything, that will determine Twist Bioscience's ability to maintain a healthy balance sheet going forward. So if you're focused on the future you can check out this free report showing analyst profit forecasts.
Over 12 months, Twist Bioscience reported revenue of US$127m, which is a gain of 73%, although it did not report any earnings before interest and tax. Shareholders probably have their fingers crossed that it can grow its way to profits.
So How Risky Is Twist Bioscience?
We have no doubt that loss making companies are, in general, riskier than profitable ones. And in the last year Twist Bioscience had an earnings before interest and tax (EBIT) loss, truth be told. Indeed, in that time it burnt through US$124m of cash and made a loss of US$135m. But at least it has US$517.0m on the balance sheet to spend on growth, near-term. With very solid revenue growth in the last year, Twist Bioscience may be on a path to profitability. Pre-profit companies are often risky, but they can also offer great rewards. The balance sheet is clearly the area to focus on when you are analysing debt. But ultimately, every company can contain risks that exist outside of the balance sheet. To that end, you should learn about the 4 warning signs we've spotted with Twist Bioscience (including 1 which is a bit unpleasant) .
At the end of the day, it's often better to focus on companies that are free from net debt. You can access our special list of such companies (all with a track record of profit growth). It's free.
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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