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. When we think about how risky a company is, we always like to look at its use of debt, since debt overload can lead to ruin. We note that Collegium Pharmaceutical, Inc. (NASDAQ:COLL) does have debt on its balance sheet. But the real question is whether this debt is making the company risky.
When Is Debt Dangerous?
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. If things get really bad, the lenders can take control of the business. However, a more common (but still painful) scenario is that it has to raise new equity capital at a low price, thus permanently diluting shareholders. Of course, the upside of debt is that it often represents cheap capital, especially when it replaces dilution in a company with the ability to reinvest at high rates of return. When we examine debt levels, we first consider both cash and debt levels, together.
How Much Debt Does Collegium Pharmaceutical Carry?
The chart below, which you can click on for greater detail, shows that Collegium Pharmaceutical had US$11.5m in debt in June 2019; about the same as the year before. But on the other hand it also has US$148.7m in cash, leading to a US$137.2m net cash position.
A Look At Collegium Pharmaceutical's Liabilities
Zooming in on the latest balance sheet data, we can see that Collegium Pharmaceutical had liabilities of US$196.3m due within 12 months and liabilities of US$19.5m due beyond that. Offsetting this, it had US$148.7m in cash and US$81.3m in receivables that were due within 12 months. So it can boast US$14.2m more liquid assets than total liabilities.
This surplus suggests that Collegium Pharmaceutical has a conservative balance sheet, and could probably eliminate its debt without much difficulty. Simply put, the fact that Collegium Pharmaceutical has more cash than debt is arguably a good indication that it can manage its debt safely. 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 Collegium Pharmaceutical can strengthen its balance sheet over time. So if you want to see what the professionals think, you might find this free report on analyst profit forecasts to be interesting.
Over 12 months, Collegium Pharmaceutical reported revenue of US$293m, which is a gain of 84%, although it did not report any earnings before interest and tax. With any luck the company will be able to grow its way to profitability.
So How Risky Is Collegium Pharmaceutical?
While Collegium Pharmaceutical lost money on an earnings before interest and tax (EBIT) level, it actually generated positive free cash flow US$81m. So taking that on face value, and considering the net cash situation, we don't think that the stock is too risky in the near term. Keeping in mind its 84% revenue growth over the last year, we think there's a decent chance the company is on track. We'd see further strong growth as an optimistic indication. When we look at a riskier company, we like to check how their profits (or losses) are trending over time. Today, we're providing readers this interactive graph showing how Collegium Pharmaceutical's profit, revenue, and operating cashflow have changed over the last few years.
Of course, if you're the type of investor who prefers buying stocks without the burden of debt, then don't hesitate to discover our exclusive list of net cash growth stocks, today.
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If you spot an error that warrants correction, please contact the editor at firstname.lastname@example.org. 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. Simply Wall St has no position in the stocks mentioned. Thank you for reading.