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 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 CorMedix, Inc. (NYSEMKT:CRMD) does have debt on its balance sheet. But the more important question is: how much risk is that debt creating?
What Risk Does Debt Bring?
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. Ultimately, if the company can't fulfill its legal obligations to repay debt, shareholders could walk away with nothing. 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. 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 CorMedix Carry?
The image below, which you can click on for greater detail, shows that at March 2019 CorMedix had debt of US$6.43m, up from none in one year. But it also has US$26.2m in cash to offset that, meaning it has US$19.8m net cash.
How Healthy Is CorMedix's Balance Sheet?
According to the last reported balance sheet, CorMedix had liabilities of US$4.33m due within 12 months, and liabilities of US$6.43m due beyond 12 months. On the other hand, it had cash of US$26.2m and US$34.4k worth of receivables due within a year. So it actually has US$15.5m more liquid assets than total liabilities.
This surplus suggests that CorMedix has a conservative balance sheet, and could probably eliminate its debt without much difficulty. Simply put, the fact that CorMedix has more cash than debt is arguably a good indication that it can manage its debt safely. When analysing debt levels, the balance sheet is the obvious place to start. But ultimately the future profitability of the business will decide if CorMedix 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.
Over 12 months, CorMedix reported revenue of US$570k, which is a gain of 82%. With any luck the company will be able to grow its way to profitability.
So How Risky Is CorMedix?
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 CorMedix lost money at the earnings before interest and tax (EBIT) line. And over the same period it saw negative free cash outflow of US$24m and booked a US$22m accounting loss. But at least it has US$26m on the balance sheet to spend on growth, near-term. With very solid revenue growth in the last year, CorMedix may be on a path to profitability. By investing before those profits, shareholders take on more risk in the hope of bigger rewards. 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 CorMedix insider transactions.
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.
We aim to bring you long-term focused research analysis driven by fundamental data. Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative material.
If you spot an error that warrants correction, please contact the editor at email@example.com. 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.