Warren Buffett famously said, “volatility is far from being synonymous with risk.” When we think about how risky a company is, we always like to look at its use of debt, because an excessive debt load can lead to ruin. More important , Fulgent Genetics, Inc. (Nasdaq: FLGTincur debts. But is this debt a concern for shareholders?
Why does debt bring risks?
Debt is a tool to help businesses grow, but if the company is unable to repay the loans to the lenders, it is at their mercy. In the worst case scenario, the company could go bankrupt if it cannot pay its creditors. However, the most common (but still painful) scenario is that it has to raise new capital at a low rate, thereby permanently weakening the shareholders. Having said that, the most common situation is when a company manages its debt sensibly – and for its own benefit. The first thing to do when thinking about how much debt a company is using is to look at cash and debt together.
What is Fulgent Genetics’ net debt?
As you can see below, Fulgent Genetics had $20.8 million in debt, in June 2022, roughly the same as the year before. You can click the chart for more details. However, she has $515.4 million in cash compensation, resulting in a net cash of $494.6 million.
A look at the full inheritance responsibilities
The latest balance sheet data shows that Fulgent Genetics has liabilities of $127.5 million maturing within a year, and liabilities of $23.4 million maturing thereafter. Against this, she had $515.4 million in cash and $137.5 million in receivables that were due within 12 months. So it can boast of liquid assets of more than 502.0 million USD the total liabilities.
This surplus strongly suggests that Fulgent Genetics has a solid balance sheet (and debt is not a concern at all). Given this fact, we believe that its balance sheet is as strong as a bull. Simply put, the fact that Fulgent Genetics has more cash than debt is arguably a good indication that it can manage its debt safely.
On the other hand, EBIT for Fulgent Genetics is down 19% over the past year. If this rate of decline in profits continues, the company may find itself in an awkward position. Obviously, the balance sheet is the area to focus on when analyzing debt. But in the end, the company’s future profitability will decide whether Fulgent Genetics can boost its balance sheet over time. So if you focus on the future, you can check it out Free Report showing analyst earnings forecasts.
Finally, while the tax man may adore accounting earnings, lenders only accept cold hard cash. While Fulgent Genetics has net cash on its balance sheet, it’s still worth taking a look at its ability to convert EBIT into free cash flow, to help us understand how quickly that money builds (or erodes) the balance. Over the past three years, Fulgent Genetics has generated robust free cash flow equivalent to 68% of its EBIT, about what we’ve been expecting. This cold steady cash means he can reduce his debt when he wants to.
A summary of the above
While we sympathize with investors who are concerned about debt, you should keep in mind that Fulgent Genetics has net cash of $494.6 million, as well as more liquid assets than liabilities. The cherry on top was that 68% of that EBIT was converted into free cash flow, bringing in $411 million. So is Fulgent Genetics’ debt a risk? It does not seem so to us. There is no doubt that we learn more about debt from the balance sheet. But in the end, every company can have off-balance sheet risks. For example, we discovered 3 Warning Signs of Fulgent Genetics (1 don’t sit well with us!) You should be familiar with it before investing here.
When all is said and done, sometimes it’s easier to focus on companies that don’t even need debt. Readers can access a file List of developing stocks with net zero debt 100% freeImmediately.
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This article by Simply Wall St is general in nature. We provide comments based only on historical data and analyst expectations 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, nor does it take into account your objectives or financial situation. We aim to provide you with focused, long-term analysis driven by essential data. Note that our analysis may not include the company’s most recent price-sensitive ads or quality materials. Wall Street simply has no position in any of the stocks mentioned.
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