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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.' It's only natural to consider a company's balance sheet when you examine how risky it is, since debt is often involved when a business collapses. We can see that Chimerix, Inc. (NASDAQ:CMRX) does use debt in its business. But is this debt a concern to shareholders?
When Is Debt A Problem?
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. Ultimately, if the company can't fulfill its legal obligations to repay debt, shareholders could walk away with nothing. However, a more usual (but still expensive) situation is where a company must dilute shareholders at a cheap share price simply to get debt under control. Of course, plenty of companies use debt to fund growth, without any negative consequences. The first thing to do when considering how much debt a business uses is to look at its cash and debt together.
How Much Debt Does Chimerix Carry?
The image below, which you can click on for greater detail, shows that at September 2021 Chimerix had debt of US$14.0m, up from none in one year. However, its balance sheet shows it holds US$122.6m in cash, so it actually has US$108.6m net cash.
A Look At Chimerix's Liabilities
Zooming in on the latest balance sheet data, we can see that Chimerix had liabilities of US$26.3m due within 12 months and liabilities of US$2.53m due beyond that. On the other hand, it had cash of US$122.6m and US$53.0k worth of receivables due within a year. So it actually has US$93.8m 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. Due to its strong net asset position, it is not likely to face issues with its lenders. Succinctly put, Chimerix boasts net cash, so it's fair to say it does not have a heavy debt load! The balance sheet is clearly the area to focus on when you are analysing debt. 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 72%, to US$3.1m. To be frank that doesn't bode well.
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 we do note that Chimerix had an earnings before interest and tax (EBIT) loss, over the last year. Indeed, in that time it burnt through US$75m of cash and made a loss of US$145m. However, it has net cash of US$108.6m, so it has a bit of time before it will need more capital. Even though its balance sheet seems sufficiently liquid, debt always makes us a little nervous if a company doesn't produce free cash flow regularly. The balance sheet is clearly the area to focus on when you are analysing debt. 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.
When all is said and done, sometimes its easier to focus on companies that don't even need debt. Readers can access a list of growth stocks with zero net debt 100% free, right now.
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.
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