Warren Buffett famously said, 'Volatility is far from synonymous with risk.' When we think about how risky a company is, we always like to look at its use of debt, since debt overload can lead to ruin. We can see that Selecta Biosciences, Inc. (NASDAQ:SELB) does use debt in its business. But is this debt a concern to shareholders?
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. Part and parcel of capitalism is the process of 'creative destruction' where failed businesses are mercilessly liquidated by their bankers. While that is not too common, we often do see indebted companies permanently diluting shareholders because lenders force them to raise capital at a distressed price. Having said that, the most common situation is where a company manages its debt reasonably well – and to its own advantage. The first step when considering a company's debt levels is to consider its cash and debt together.
View our latest analysis for Selecta Biosciences
The chart below, which you can click on for greater detail, shows that Selecta Biosciences had US$25.9m in debt in June 2022; about the same as the year before. However, its balance sheet shows it holds US$142.1m in cash, so it actually has US$116.1m net cash.
The latest balance sheet data shows that Selecta Biosciences had liabilities of US$33.8m due within a year, and liabilities of US$64.7m falling due after that. On the other hand, it had cash of US$142.1m and US$24.0m worth of receivables due within a year. So it actually has US$67.6m more liquid assets than total liabilities.
This surplus suggests that Selecta Biosciences is using debt in a way that is appears to be both safe and conservative. Given it has easily adequate short term liquidity, we don't think it will have any issues with its lenders. Simply put, the fact that Selecta Biosciences has more cash than debt is arguably a good indication that it can manage its debt safely.
It was also good to see that despite losing money on the EBIT line last year, Selecta Biosciences turned things around in the last 12 months, delivering and EBIT of US$27m. The balance sheet is clearly the area to focus on when you are analysing debt. But ultimately the future profitability of the business will decide if Selecta Biosciences 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.
But our final consideration is also important, because a company cannot pay debt with paper profits; it needs cold hard cash. Selecta Biosciences may have net cash on the balance sheet, but it is still interesting to look at how well the business converts its earnings before interest and tax (EBIT) to free cash flow, because that will influence both its need for, and its capacity to manage debt. During the last year, Selecta Biosciences burned a lot of cash. While investors are no doubt expecting a reversal of that situation in due course, it clearly does mean its use of debt is more risky.
While we empathize with investors who find debt concerning, you should keep in mind that Selecta Biosciences has net cash of US$116.1m, as well as more liquid assets than liabilities. So we are not troubled with Selecta Biosciences's debt use. 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. Be aware that Selecta Biosciences is showing 3 warning signs in our investment analysis , and 1 of those makes us a bit uncomfortable…
If, after all that, you're more interested in a fast growing company with a rock-solid balance sheet, then check out our list of net cash growth stocks without delay.
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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.
Find out whether Selecta Biosciences is potentially over or undervalued by checking out our comprehensive analysis, which includes fair value estimates, risks and warnings, dividends, insider transactions and financial health.
Simply Wall St's Editorial Team provides unbiased, factual reporting on global stocks using in-depth fundamental analysis.
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Selecta Biosciences, Inc., a clinical-stage biopharmaceutical company, engages in the research and development of nanoparticle immunomodulatory drugs for the treatment and prevention of human diseases.
The Snowflake is a visual investment summary with the score of each axis being calculated by 6 checks in 5 areas.
Read more about these checks in the individual report sections or in our analysis model.
Adequate balance sheet with proven track record.
Simply Wall St's Editorial Team provides unbiased, factual reporting on global stocks using in-depth fundamental analysis.
Find out more about our editorial guidelines and team.
Selecta Biosciences, Inc., a clinical-stage biopharmaceutical company, engages in the research and development of nanoparticle immunomodulatory drugs for the treatment and prevention of human diseases.
The Snowflake is a visual investment summary with the score of each axis being calculated by 6 checks in 5 areas.
Read more about these checks in the individual report sections or in our analysis model.
Adequate balance sheet with proven track record.
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