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.' So it seems the smart money knows that debt - which is usually involved in bankruptcies - is a very important factor, when you assess how risky a company is. We can see that Adaptive Biotechnologies Corporation (NASDAQ:ADPT) does use debt in its business. But the more important question is: how much risk is that debt creating?

Why Does Debt Bring Risk?

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. If things get really bad, the lenders can take control of the business. However, a more frequent (but still costly) occurrence is where a company must issue shares at bargain-basement prices, permanently diluting shareholders, just to shore up its balance sheet. Having said that, the most common situation is where a company manages its debt reasonably well - and to its own advantage. When we think about a company's use of debt, we first look at cash and debt together.

How Much Debt Does Adaptive Biotechnologies Carry?

As you can see below, Adaptive Biotechnologies had US$132.7m of debt, at September 2024, which is about the same as the year before. You can click the chart for greater detail. However, it does have US$243.3m in cash offsetting this, leading to net cash of US$110.6m.

How Healthy Is Adaptive Biotechnologies' Balance Sheet?

According to the last reported balance sheet, Adaptive Biotechnologies had liabilities of US$87.6m due within 12 months, and liabilities of US$247.3m due beyond 12 months. Offsetting this, it had US$243.3m in cash and US$42.1m in receivables that were due within 12 months. So its liabilities total US$49.5m more than the combination of its cash and short-term receivables.

Of course, Adaptive Biotechnologies has a market capitalization of US$1.06b, so these liabilities are probably manageable. But there are sufficient liabilities that we would certainly recommend shareholders continue to monitor the balance sheet, going forward. 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. The balance sheet is clearly the area to focus on when you are analysing debt. But it is future earnings, more than anything, that will determine Adaptive Biotechnologies's ability to maintain a healthy balance sheet going forward. 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 Adaptive Biotechnologies's revenue was pretty flat, and it made a negative EBIT. While that hardly impresses, its not too bad either.

So How Risky Is Adaptive Biotechnologies?

We have no doubt that loss making companies are, in general, riskier than profitable ones. And the fact is that over the last twelve months Adaptive Biotechnologies lost money at the earnings before interest and tax (EBIT) line. And over the same period it saw negative free cash outflow of US$115m and booked a US$195m accounting loss. But at least it has US$110.6m 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. 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. To that end, you should be aware of the 2 warning signs we've spotted with Adaptive Biotechnologies .

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

Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team (at) simplywallst.com.
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.