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.' 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 can see that Correvio Pharma Corp. (TSE:CORV) does use debt in its business. But is this debt a concern to shareholders?
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. In the worst case scenario, a company can go bankrupt if it cannot pay its creditors. 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, debt can be an important tool in businesses, particularly capital heavy businesses. When we think about a company's use of debt, we first look at cash and debt together.
What Is Correvio Pharma's Debt?
As you can see below, at the end of June 2019, Correvio Pharma had US$43.1m of debt, up from US$40.0m a year ago. Click the image for more detail. However, because it has a cash reserve of US$12.9m, its net debt is less, at about US$30.3m.
How Healthy Is Correvio Pharma's Balance Sheet?
The latest balance sheet data shows that Correvio Pharma had liabilities of US$17.4m due within a year, and liabilities of US$41.6m falling due after that. Offsetting these obligations, it had cash of US$12.9m as well as receivables valued at US$8.21m due within 12 months. So its liabilities total US$37.9m more than the combination of its cash and short-term receivables.
Correvio Pharma has a market capitalization of US$83.0m, so it could very likely raise cash to ameliorate its balance sheet, if the need arose. But it's clear that we should definitely closely examine whether it can manage its debt without dilution. The balance sheet is clearly the area to focus on when you are analysing debt. But it is future earnings, more than anything, that will determine Correvio Pharma's ability to maintain a healthy balance sheet going forward. So if you're focused on the future you can check out this free report showing analyst profit forecasts.
In the last year Correvio Pharma managed to grow its revenue by 19%, to US$31m. That rate of growth is a bit slow for our taste, but it takes all types to make a world.
Importantly, Correvio Pharma had negative earnings before interest and tax (EBIT), over the last year. Indeed, it lost a very considerable US$23m at the EBIT level. When we look at that and recall the liabilities on its balance sheet, relative to cash, it seems unwise to us for the company to have any debt. So we think its balance sheet is a little strained, though not beyond repair. Another cause for caution is that is bled US$26m in negative free cash flow over the last twelve months. 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 Correvio Pharma insider transactions.
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.
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