Is Pluristem Therapeutics (NASDAQ: PSTI) Using Too Much Debt?

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Berkshire Hathaway’s Charlie Munger-backed external fund manager Li Lu is quick to say “The biggest risk in investing is not price volatility, but whether you will suffer a permanent loss of capital”. It’s only natural to consider a company’s balance sheet when looking at its level of risk, as debt is often involved when a business collapses. Above all, Pluristem Therapeutics inc. (NASDAQ: PSTI) is in debt. But the most important question is: what risk does this debt create?

Why Does Debt Bring Risk?

Generally speaking, debt only becomes a real problem when a company cannot repay it easily, either by raising capital or with its own cash flow. If things really go wrong, lenders can take over the business. However, a more common (but still costly) situation is where a company has to dilute its shareholders at a cheap share price just to get its 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 in examining a company’s debt levels is to consider its cash flow and debt together.

What is Pluristem Therapeutics’ net debt?

You can click on the graph below for the historical numbers, but it shows that as of June 2021, Pluristem Therapeutics had a debt of $ 23.9 million, an increase from none, year over year. But on the other hand, it also has $ 65.0 million in cash, which leads to a net cash position of $ 41.1 million.

NasdaqGM: History of debt to equity of the PSTI November 1, 2021

How strong is Pluristem Therapeutics’ balance sheet?

According to the latest published balance sheet, Pluristem Therapeutics had liabilities of US $ 11.5 million due within 12 months and liabilities of US $ 24.9 million due beyond 12 months. In return, he had $ 65.0 million in cash and $ 1.49 million in receivables due within 12 months. He can therefore avail himself of $ 30.1 million in liquid assets more than total Liabilities.

This abundant liquidity means that Pluristem Therapeutics’ balance sheet is as solid as a giant sequoia. With this in mind, one could postulate that its track record means that the company is able to cope with some adversity. Put simply, the fact that Pluristem Therapeutics has more cash than debt is probably a good indication that it can manage its debt safely. There is no doubt that we learn the most about debt from the balance sheet. But ultimately, the company’s future profitability will decide whether Pluristem Therapeutics can strengthen its balance sheet over time. So if you are focused on the future you can check this out free report showing analysts’ earnings forecasts.

Since Pluristem Therapeutics does not have significant operating income, shareholders can expect it to come up with a great new product, before it runs out of cash.

So how risky is Pluristem Therapeutics?

By their very nature, businesses that lose money are riskier than those with a long history of profitability. And the point is that over the past twelve months Pluristem Therapeutics has lost money in earnings before interest and taxes (EBIT). Indeed, during that time, it burned $ 31 million in cash and recorded a loss of $ 50 million. With only US $ 41.1 million on the balance sheet, it looks like it will soon have to raise capital again. Even if its balance sheet seems sufficiently liquid, debt always makes us a little nervous if a company does not produce regular free cash flow. The balance sheet is clearly the area you need to focus on when analyzing debt. However, not all investment risks lie on the balance sheet – far from it. Concrete example: we have spotted 5 warning signs for Pluristem Therapeutics you have to be aware of that, and one of them makes us a little uncomfortable.

If, after all of this, you’re more interested in a fast-growing company with a strong balance sheet, take a quick look at our list of cash net growth stocks.

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

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