Some say volatility, rather than debt, is the best way to think about risk as an investor, but Warren Buffett famously said that 'Volatility is far from synonymous with risk.' 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. We note that Pliant Therapeutics, Inc. (NASDAQ:PLRX) does have debt on its balance sheet. But should shareholders be worried about its use of debt?

When Is Debt A Problem?

Generally speaking, debt only becomes a real problem when a company can't easily pay it off, either by raising capital or with its own cash flow. Ultimately, if the company can't fulfill its legal obligations to repay debt, shareholders could walk away with nothing. 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. Of course, plenty of companies use debt to fund growth, without any negative consequences. When we examine debt levels, we first consider both cash and debt levels, together.

See our latest analysis for Pliant Therapeutics

What Is Pliant Therapeutics's Debt?

The chart below, which you can click on for greater detail, shows that Pliant Therapeutics had US$10.0m in debt in September 2023; about the same as the year before. But it also has US$523.6m in cash to offset that, meaning it has US$513.6m net cash.

How Healthy Is Pliant Therapeutics' Balance Sheet?

The latest balance sheet data shows that Pliant Therapeutics had liabilities of US$27.4m due within a year, and liabilities of US$10.0m falling due after that. Offsetting this, it had US$523.6m in cash and US$2.12m in receivables that were due within 12 months. So it actually has US$488.3m more liquid assets than total liabilities.

This luscious liquidity implies that Pliant Therapeutics' balance sheet is sturdy like a giant sequoia tree. Having regard to this fact, we think its balance sheet is as strong as an ox. Succinctly put, Pliant Therapeutics boasts net cash, so it's fair to say it does not have a heavy debt load! 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 Pliant Therapeutics can strengthen its balance sheet over time. 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 Pliant Therapeutics had a loss before interest and tax, and actually shrunk its revenue by 64%, to US$3.5m. To be frank that doesn't bode well.

So How Risky Is Pliant Therapeutics?

Statistically speaking companies that lose money are riskier than those that make money. And we do note that Pliant Therapeutics had an earnings before interest and tax (EBIT) loss, over the last year. Indeed, in that time it burnt through US$124m of cash and made a loss of US$155m. With only US$513.6m on the balance sheet, it would appear that its going to need to raise capital again soon. Overall, its balance sheet doesn't seem overly risky, at the moment, but we're always cautious until we see the positive free cash flow. The balance sheet is clearly the area to focus on when you are analysing debt. However, not all investment risk resides within the balance sheet - far from it. Be aware that Pliant Therapeutics is showing 4 warning signs in our investment analysis , and 1 of those is potentially serious...

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.