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'. So it might be obvious that you need to consider debt, when you think about how risky any given stock is, because too much debt can sink a company. Importantly, Cerus Corporation (NASDAQ:CERS) does carry debt. But should shareholders be worried about its use of debt?
When Is Debt Dangerous?
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. While that is not too common, we often do see indebted companies permanently diluting shareholders because lenders force them to raise capital at a distressed price. Having said that, the most common situation is where a company manages its debt reasonably well - and to its own advantage. The first thing to do when considering how much debt a business uses is to look at its cash and debt together.
What Is Cerus's Net Debt?
You can click the graphic below for the historical numbers, but it shows that as of September 2019 Cerus had US$44.4m of debt, an increase on US$29.9, over one year. But on the other hand it also has US$85.1m in cash, leading to a US$40.7m net cash position.
How Strong Is Cerus's Balance Sheet?
We can see from the most recent balance sheet that Cerus had liabilities of US$45.6m falling due within a year, and liabilities of US$58.1m due beyond that. Offsetting these obligations, it had cash of US$85.1m as well as receivables valued at US$15.8m due within 12 months. So it has liabilities totalling US$2.69m more than its cash and near-term receivables, combined.
Having regard to Cerus's size, it seems that its liquid assets are well balanced with its total liabilities. So it's very unlikely that the US$608.1m company is short on cash, but still worth keeping an eye on the balance sheet. While it does have liabilities worth noting, Cerus 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 it is future earnings, more than anything, that will determine Cerus'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 Cerus wasn't profitable at an EBIT level, but managed to grow its revenue by 16%, to US$70m. We usually like to see faster growth from unprofitable companies, but each to their own.
So How Risky Is Cerus?
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 Cerus lost money at the earnings before interest and tax (EBIT) line. Indeed, in that time it burnt through US$73m of cash and made a loss of US$71m. However, it has net cash of US$40.7m, so it has a bit of time before it will need more capital. Summing up, we're a little skeptical of this one, as it seems fairly risky in the absence of free cashflow. When I consider a company to be a bit risky, I think it is responsible to check out whether insiders have been reporting any share sales. Luckily, you can click here ito see our graphic depicting Cerus insider transactions.
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.
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