Howard Marks put it nicely when he said that, rather than worrying about share price volatility, 'The possibility of permanent loss is the risk I worry about... and every practical investor I know worries about.' So it seems the smart money knows that debt - which is usually involved in bankruptcies - is a very important factor, when you assess how risky a company is. We note that Coherus BioSciences, Inc. (NASDAQ:CHRS) does have debt on its balance sheet. But the real question is whether this debt is making the company risky.
What Risk Does Debt Bring?
Generally speaking, debt only becomes a real problem when a company can't easily pay it off, either by raising capital or with its own cash flow. Part and parcel of capitalism is the process of 'creative destruction' where failed businesses are mercilessly liquidated by their bankers. 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. Having said that, the most common situation is where a company manages its debt reasonably well - and to its own advantage. The first step when considering a company's debt levels is to consider its cash and debt together.
What Is Coherus BioSciences's Net Debt?
You can click the graphic below for the historical numbers, but it shows that as of June 2019 Coherus BioSciences had US$177.2m of debt, an increase on US$102.3m, over one year. On the flip side, it has US$111.9m in cash leading to net debt of about US$65.3m.
A Look At Coherus BioSciences's Liabilities
We can see from the most recent balance sheet that Coherus BioSciences had liabilities of US$61.2m falling due within a year, and liabilities of US$183.2m due beyond that. Offsetting this, it had US$111.9m in cash and US$77.4m in receivables that were due within 12 months. So its liabilities outweigh the sum of its cash and (near-term) receivables by US$55.1m.
Given Coherus BioSciences has a market capitalization of US$1.53b, it's hard to believe these liabilities pose much threat. However, we do think it is worth keeping an eye on its balance sheet strength, as it may change over time. 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 Coherus BioSciences 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.
While it hasn't made a profit, at least Coherus BioSciences booked its first revenue as a publicly listed company, in the last twelve months.
Importantly, Coherus BioSciences had negative earnings before interest and tax (EBIT), over the last year. Indeed, it lost US$103m at the EBIT level. Considering that alongside the liabilities mentioned above does not give us much confidence that company should be using so much debt. So we think its balance sheet is a little strained, though not beyond repair. However, it doesn't help that it burned through US$136m of cash over the last year. So in short it's a really risky stock. 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 Coherus BioSciences 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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