Is Personalis (NASDAQ:PSNL) using debt in a risky way?

Legendary fund manager Li Lu (whom Charlie Munger once backed) once said, “The greatest risk in investing is not price volatility, but whether you will suffer a permanent loss of capital. So it may be obvious that you need to take debt into account when thinking about the risk of a given stock, because too much debt can sink a business. Above all, Personalis, Inc. (NASDAQ: PSNL) is in debt. But should shareholders worry about its use of debt?

Why is debt risky?

Debt helps a business until the business struggles to pay it back, either with new capital or with free cash flow. An integral part of capitalism is the process of “creative destruction” where bankrupt companies are mercilessly liquidated by their bankers. However, a more common (but still costly) situation is when a company has to dilute shareholders at a cheap share price just to keep debt under control. Of course, the advantage of debt is that it often represents cheap capital, especially when it replaces dilution in a business with the ability to reinvest at high rates of return. The first step when considering a company’s debt levels is to consider its cash and debt together.

Check out our latest analysis for Personalis

What is Personalis’ debt?

You can click on the graph below for historical numbers, but it shows that in September 2021, Personalis had debt of $3.44 million, an increase from zero, year over year. However, he has $305.2 million in cash to offset this, which translates to net cash of $301.8 million.

NasdaqGM: Historical Debt to Equity PSNL February 17, 2022

A look at the responsibilities of Personalis

We can see from the most recent balance sheet that Personalis had liabilities of $26.5 million due in one year, and liabilities of $54.9 million beyond. In return, he had $305.2 million in cash and $10.5 million in receivables due within 12 months. So he actually has 234.4 million US dollars Following liquid assets than total liabilities.

This surplus strongly suggests that Personalis has a rock-solid balance sheet (and debt is absolutely nothing to worry about). From this perspective, lenders should feel as secure as the beloved of a black belt karate master. Simply put, the fact that Personalis has more cash than debt is probably a good indication that it can safely manage its debt. When analyzing debt levels, the balance sheet is the obvious starting point. But ultimately, the company’s future profitability will decide whether Personalis can strengthen its balance sheet over time. So if you are focused on the future, you can check out this free report showing analyst earnings forecast.

Year-over-year Personalis posted revenue of $85 million, a gain of 11%, although it reported no earnings before interest and taxes. This rate of growth is a bit slow for our liking, but it takes all types to make a world.

So, how risky is Personalis?

We have no doubt that loss-making companies are, in general, more risky than profitable companies. And we note that Personalis recorded a loss in earnings before interest and taxes (EBIT) over the past year. And during the same period, it recorded a negative free cash outflow of US$66 million and recorded a book loss of US$58 million. While this makes the business a bit risky, it’s important to remember that it has a net cash position of US$301.8 million. That means it could continue spending at its current rate for more than two years. Even if its balance sheet seems sufficiently liquid, debt always makes us a little nervous if a company does not produce free cash flow regularly. There is no doubt that we learn the most about debt from the balance sheet. However, not all investment risks reside on the balance sheet, far from it. Example: we have identified 4 warning signs for Personalis you should be aware.

If you are interested in investing in companies that can generate profits without the burden of debt, then check out this free list of growing companies that have net cash on the balance sheet.

This Simply Wall St article is general in nature. We provide commentary based on historical data and analyst forecasts only using unbiased methodology and our articles are not intended to be financial advice. It is not a recommendation to buy or sell stocks and does not take into account your objectives or financial situation. Our goal is to bring you targeted long-term analysis based on fundamental data. Note that our analysis may not take into account the latest announcements from price-sensitive companies or qualitative materials. Simply Wall St has no position in the stocks mentioned.

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