Does FibroGen (NASDAQ:FGEN) Have A Healthy Balance Sheet?

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Simply Wall St

Sat, Jan 1, 2022, 6:40 AM 4 min read

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.' 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. As with many other companies FibroGen, Inc. (NASDAQ:FGEN) makes use of debt. But the real question is whether this debt is making the company risky.

What Risk Does Debt Bring?

Debt is a tool to help businesses grow, but if a business is incapable of paying off its lenders, then it exists at their mercy. If things get really bad, the lenders can take control of the business. 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. By replacing dilution, though, debt can be an extremely good tool for businesses that need capital to invest in growth at high rates of return. When we examine debt levels, we first consider both cash and debt levels, together.

Check out our latest analysis for FibroGen

What Is FibroGen's Debt?

The chart below, which you can click on for greater detail, shows that FibroGen had US$17.9m in debt in September 2021; about the same as the year before. However, its balance sheet shows it holds US$486.4m in cash, so it actually has US$468.5m net cash.

debt-equity-history-analysis — NasdaqGS:FGEN Debt to Equity History January 1st 2022

A Look At FibroGen's Liabilities

The latest balance sheet data shows that FibroGen had liabilities of US$209.3m due within a year, and liabilities of US$296.1m falling due after that. Offsetting these obligations, it had cash of US$486.4m as well as receivables valued at US$44.0m due within 12 months. So it actually has US$24.9m more liquid assets than total liabilities.

Having regard to FibroGen's size, it seems that its liquid assets are well balanced with its total liabilities. So while it's hard to imagine that the US$1.31b company is struggling for cash, we still think it's worth monitoring its balance sheet. Simply put, the fact that FibroGen 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 FibroGen'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.

In the last year FibroGen wasn't profitable at an EBIT level, but managed to grow its revenue by 138%, to US$284m. So its pretty obvious shareholders are hoping for more growth!

So How Risky Is FibroGen?

By their very nature companies that are losing money are more risky than those with a long history of profitability. And we do note that FibroGen had an earnings before interest and tax (EBIT) loss, over the last year. Indeed, in that time it burnt through US$66m of cash and made a loss of US$215m. While this does make the company a bit risky, it's important to remember it has net cash of US$468.5m. That kitty means the company can keep spending for growth for at least two years, at current rates. The good news for shareholders is that FibroGen has dazzling revenue growth, so there's a very good chance it can boost its free cash flow in the years to come. High growth pre-profit companies may well be risky, but they can also offer great rewards. 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 - FibroGen has 2 warning signs we think you should be aware of.

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.

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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.