Is Fortress Biotech (NASDAQ:FBIO) Weighed On By Its Debt Load?

The external fund manager backed by Berkshire Hathaway's Charlie Munger, Li Lu, makes no bones about it when he says 'The biggest investment risk is not the volatility of prices, but whether you will suffer a permanent loss of capital.' 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 can see that Fortress Biotech, Inc. (NASDAQ:FBIO) does use debt in its business. But the real question is whether this debt is making the company risky.

When Is Debt Dangerous?

Generally speaking, debt only becomes a real problem when a company can't easily pay it off, either by raising capital or with its own cash flow. 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. Of course, the upside of debt is that it often represents cheap capital, especially when it replaces dilution in a company with the ability to reinvest at high rates of return. The first thing to do when considering how much debt a business uses is to look at its cash and debt together.

Check out our latest analysis for Fortress Biotech

What Is Fortress Biotech's Debt?

The image below, which you can click on for greater detail, shows that Fortress Biotech had debt of US$64.3m at the end of December 2020, a reduction from US$89.6m over a year. But it also has US$233.4m in cash to offset that, meaning it has US$169.0m net cash.

A Look At Fortress Biotech's Liabilities

According to the last reported balance sheet, Fortress Biotech had liabilities of US$48.0m due within 12 months, and liabilities of US$83.9m due beyond 12 months. Offsetting these obligations, it had cash of US$233.4m as well as receivables valued at US$20.1m due within 12 months. So it actually has US$121.6m more liquid assets than total liabilities.

This luscious liquidity implies that Fortress Biotech's balance sheet is sturdy like a giant sequoia tree. With this in mind one could posit that its balance sheet means the company is able to handle some adversity. Succinctly put, Fortress Biotech boasts net cash, so it's fair to say it does not have a heavy debt load! There's no doubt that we learn most about debt from the balance sheet. But ultimately the future profitability of the business will decide if Fortress Biotech can strengthen its balance sheet over time. So if you're focused on the future you can check out this free report showing analyst profit forecasts.

Over 12 months, Fortress Biotech reported revenue of US$46m, which is a gain of 24%, although it did not report any earnings before interest and tax. With any luck the company will be able to grow its way to profitability.

So How Risky Is Fortress Biotech?

We have no doubt that loss making companies are, in general, riskier than profitable ones. And the fact is that over the last twelve months Fortress Biotech lost money at the earnings before interest and tax (EBIT) line. And over the same period it saw negative free cash outflow of US$91m and booked a US$47m accounting loss. However, it has net cash of US$169.0m, so it has a bit of time before it will need more capital. With very solid revenue growth in the last year, Fortress Biotech may be on a path to profitability. Pre-profit companies are often risky, but they can also offer great rewards. There's no doubt that we learn most about debt from the balance sheet. But ultimately, every company can contain risks that exist outside of the balance sheet. These risks can be hard to spot. Every company has them, and we've spotted 4 warning signs for Fortress Biotech you should know about.

When all is said and done, sometimes its easier to focus on companies that don't even need debt. Readers can access a list of growth stocks with zero net debt 100% free, right now.

This article by Simply Wall St is general in nature. 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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