Is Adaptive Biotechnologies (NASDAQ:ADPT) Using Too Much Debt?

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. Importantly, Adaptive Biotechnologies Corporation (NASDAQ:ADPT) does carry debt. But is this debt a concern to shareholders?

Why Does Debt Bring Risk?

Debt and other liabilities become risky for a business when it cannot easily fulfill those obligations, either with free cash flow or by raising capital at an attractive price. Part and parcel of capitalism is the process of 'creative destruction' where failed businesses are mercilessly liquidated by their bankers. However, a more common (but still painful) scenario is that it has to raise new equity capital at a low price, thus permanently diluting shareholders. Of course, debt can be an important tool in businesses, particularly capital heavy businesses. The first thing to do when considering how much debt a business uses is to look at its cash and debt together.

What Is Adaptive Biotechnologies's Debt?

As you can see below, Adaptive Biotechnologies had US$132.1m of debt, at June 2024, which is about the same as the year before. You can click the chart for greater detail. But on the other hand it also has US$291.9m in cash, leading to a US$159.8m net cash position.

How Strong Is Adaptive Biotechnologies' Balance Sheet?

Zooming in on the latest balance sheet data, we can see that Adaptive Biotechnologies had liabilities of US$88.1m due within 12 months and liabilities of US$255.3m due beyond that. Offsetting these obligations, it had cash of US$291.9m as well as receivables valued at US$36.8m due within 12 months. So it has liabilities totalling US$14.8m more than its cash and near-term receivables, combined.

Having regard to Adaptive Biotechnologies' size, it seems that its liquid assets are well balanced with its total liabilities. So while it's hard to imagine that the US$740.3m company is struggling for cash, we still think it's worth monitoring its balance sheet. While it does have liabilities worth noting, Adaptive Biotechnologies also has more cash than debt, so we're pretty confident it can manage its debt safely. 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 Adaptive Biotechnologies 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, Adaptive Biotechnologies made a loss at the EBIT level, and saw its revenue drop to US$169m, which is a fall of 11%. That's not what we would hope to see.

So How Risky Is Adaptive Biotechnologies?

Statistically speaking companies that lose money are riskier than those that make money. And in the last year Adaptive Biotechnologies had an earnings before interest and tax (EBIT) loss, truth be told. Indeed, in that time it burnt through US$137m of cash and made a loss of US$213m. But at least it has US$159.8m on the balance sheet to spend on growth, near-term. Summing up, we're a little skeptical of this one, as it seems fairly risky in the absence of free cashflow. When analysing debt levels, the balance sheet is the obvious place to start. However, not all investment risk resides within the balance sheet - far from it. These risks can be hard to spot. Every company has them, and we've spotted 2 warning signs for Adaptive Biotechnologies you should know about.

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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