Is Virgin Galactic Holdings (NYSE:SPCE) a risky investment?
Legendary fund manager Li Lu (whom Charlie Munger once backed) once said, “The greatest risk in investing is not price volatility, but whether you will suffer a permanent loss of capital. When we think of a company’s risk, we always like to look at its use of debt, because over-indebtedness can lead to ruin. We can see that Virgin Galactic Holdings, Inc. (NYSE: SPCE) uses debt in its operations. But should shareholders worry about its use of debt?
When is debt dangerous?
Debt and other liabilities become risky for a business when it cannot easily meet those obligations, either with free cash flow or by raising capital at an attractive price. An integral part of capitalism is the process of “creative destruction” where bankrupt companies are mercilessly liquidated by their bankers. However, a more common (but still painful) scenario is that it has to raise new equity at a low price, thereby permanently diluting shareholders. Of course, debt can be an important tool in businesses, especially capital-intensive businesses. The first step when considering a company’s debt levels is to consider its cash and debt together.
Check out our latest analysis for Virgin Galactic Holdings
How much debt does Virgin Galactic Holdings have?
The image below, which you can click on for more details, shows that as of December 2021, Virgin Galactic Holdings had $2.64 million in debt, up from $620,000 in one year. However, his balance sheet shows that he holds $603.9 million in cash, so he actually has $601.3 million in net cash.
How strong is Virgin Galactic Holdings’ balance sheet?
According to the last published balance sheet, Virgin Galactic Holdings had liabilities of $131.5 million due within 12 months and liabilities of $43.0 million due beyond 12 months. In compensation for these obligations, it had cash of 603.9 million US dollars as well as receivables valued at 829.0 thousand US dollars maturing within 12 months. He can therefore boast of having $430.2 million in cash more than total Passives.
It’s good to see that Virgin Galactic Holdings has plenty of cash on its balance sheet, suggesting careful liability management. Given that he has easily sufficient short-term cash, we don’t think he will have any problems with his lenders. Simply put, the fact that Virgin Galactic Holdings has more cash than debt is arguably a good indication that it can safely manage its debt. The balance sheet is clearly the area to focus on when analyzing debt. But it is future earnings, more than anything, that will determine Virgin Galactic Holdings’ ability to maintain a healthy balance sheet in the future. So if you are focused on the future, you can check out this free report showing analyst earnings forecast.
Year-over-year, Virgin Galactic Holdings posted revenue of $3.3 million, a 1,283% gain, although it reported no earnings before interest and taxes. When it comes to revenue growth, it’s like winning the 3-point game!
So what is the risk of Virgin Galactic Holdings?
By their very nature, companies that lose money are riskier than those with a long history of profitability. And over the past year, Virgin Galactic Holdings has posted a loss in earnings before interest and taxes (EBIT), if truth be told. And during the same period, it recorded a negative free cash outflow of US$235 million and recorded a book loss of US$353 million. However, he has a net cash position of US$601.3 million, so he still has some time before he needs more capital. The good news for shareholders is that Virgin Galactic Holdings has skyrocketing revenue growth, so there’s a very good chance it can increase its free cash flow in the years to come. While unprofitable businesses can be risky, they can also grow strongly and quickly in those pre-profit years. The balance sheet is clearly the area to focus on when analyzing debt. However, not all investment risks reside on the balance sheet, far from it. These risks can be difficult to spot. Every business has them, and we’ve spotted 4 warning signs for Virgin Galactic Holdings you should know.
If you are interested in investing in companies that can generate profits without the burden of debt, then check out this free list of growing companies that have net cash on the balance sheet.
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This Simply Wall St article is general in nature. We provide commentary based on historical data and analyst forecasts only using unbiased methodology and our articles are not intended to be financial advice. It is not a recommendation to buy or sell stocks and does not take into account your objectives or financial situation. Our goal is to bring you targeted long-term analysis based on fundamental data. Note that our analysis may not take into account the latest announcements from price-sensitive companies or qualitative materials. Simply Wall St has no position in the stocks mentioned.