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Legendary fund manager Li Lu (who Charlie Munger backed) once said, 'The biggest investment risk is not the volatility of prices, but whether you will suffer a permanent loss of capital.' 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. We note that Chimerix, Inc. (NASDAQ:CMRX) does have debt on its balance sheet. But is this debt a concern to shareholders?
What Risk Does Debt Bring?
Debt is a tool to help businesses grow, but if a business is incapable of paying off its lenders, then it exists at their mercy. In the worst case scenario, a company can go bankrupt if it cannot pay its creditors. 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. By replacing dilution, though, debt can be an extremely good tool for businesses that need capital to invest in growth at high rates of return. The first step when considering a company's debt levels is to consider its cash and debt together.
How Much Debt Does Chimerix Carry?
As you can see below, at the end of March 2021, Chimerix had US$14.0m of debt, up from none a year ago. Click the image for more detail. But on the other hand it also has US$145.0m in cash, leading to a US$131.0m net cash position.
How Healthy Is Chimerix's Balance Sheet?
The latest balance sheet data shows that Chimerix had liabilities of US$22.2m due within a year, and liabilities of US$2.75m falling due after that. On the other hand, it had cash of US$145.0m and US$482.0k worth of receivables due within a year. So it can boast US$120.5m more liquid assets than total liabilities.
It's good to see that Chimerix has plenty of liquidity on its balance sheet, suggesting conservative management of liabilities. Given it has easily adequate short term liquidity, we don't think it will have any issues with its lenders. Succinctly put, Chimerix boasts net cash, so it's fair to say it does not have a heavy debt load! There's no doubt that we learn most about debt from the balance sheet. But ultimately the future profitability of the business will decide if Chimerix can strengthen its balance sheet over time. So if you're focused on the future you can check out this free report showing analyst profit forecasts.
In the last year Chimerix had a loss before interest and tax, and actually shrunk its revenue by 51%, to US$5.6m. That makes us nervous, to say the least.
So How Risky Is Chimerix?
By their very nature companies that are losing money are more risky than those with a long history of profitability. And the fact is that over the last twelve months Chimerix lost money at the earnings before interest and tax (EBIT) line. Indeed, in that time it burnt through US$63m of cash and made a loss of US$131m. However, it has net cash of US$131.0m, so it has a bit of time before it will need more capital. 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. When analysing debt levels, the balance sheet is the obvious place to start. But ultimately, every company can contain risks that exist outside of the balance sheet. For example, we've discovered 2 warning signs for Chimerix that you should be aware of before investing here.
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.
This article by Simply Wall St is general in nature. 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.
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