Fortress Biotech is being weighed on its Debt Load

Fortress Biotech Inc. (NASDAQ:FBIO) clearly uses debt in its operations. But the real issue is whether the company’s debt makes it risky. Debt becomes a major issue when a business can’t quickly pay it off, either by raising money or through its own cash flow. In the end, if the corporation is unable to meet its legal obligations to repay debt, shareholders will be left with nothing.

Li Lu, an external fund manager backed by Berkshire Hathaway’s Charlie Munger, says bluntly, “The greatest investment risk is not market uncertainty, but whether you will experience a permanent loss of money.” So it seems that the smart money understands that debt – which is often associated with bankruptcies – is a critical factor to consider when determining how risky a business is.

A more common (but still costly) scenario is when a business has to dilute shareholders at a low share price simply to bring debt under control. Of course, debt has the advantage of being inexpensive capital, especially as it replaces dilution in a business with the opportunity to reinvest at high rates of return. When determining how much debt a company needs, the first step is to combine its cash and debt.

Fortress Biotech had liabilities of US$48.0 million due within 12 months and US $83.9 million due beyond 12 months, according to its most recent balance sheet. It had cash of US $233.4 million and receivables of US $20.1 million due in the next 12 months to cover these obligations. As a result, it has US $121.6 million in liquid assets versus total liabilities.