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. 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. Importantly, Cumberland Pharmaceuticals Inc. (NASDAQ:CPIX) does carry debt. But the real question is whether this debt is making the company risky.
What Risk Does Debt Bring?
Debt assists a business until the business has trouble paying it off, either with new capital or with free cash flow. Ultimately, if the company can't fulfill its legal obligations to repay debt, shareholders could walk away with nothing. However, a more frequent (but still costly) occurrence is where a company must issue shares at bargain-basement prices, permanently diluting shareholders, just to shore up its balance sheet. Having said that, the most common situation is where a company manages its debt reasonably well - and to its own advantage. When we think about a company's use of debt, we first look at cash and debt together.
What Is Cumberland Pharmaceuticals's Debt?
As you can see below, at the end of June 2019, Cumberland Pharmaceuticals had US$20.0m of debt, up from US$12.0m a year ago. Click the image for more detail. However, its balance sheet shows it holds US$30.4m in cash, so it actually has US$10.4m net cash.
How Healthy Is Cumberland Pharmaceuticals's Balance Sheet?
We can see from the most recent balance sheet that Cumberland Pharmaceuticals had liabilities of US$22.3m falling due within a year, and liabilities of US$31.5m due beyond that. Offsetting this, it had US$30.4m in cash and US$8.43m in receivables that were due within 12 months. So its liabilities outweigh the sum of its cash and (near-term) receivables by US$15.0m.
Since publicly traded Cumberland Pharmaceuticals shares are worth a total of US$85.5m, it seems unlikely that this level of liabilities would be a major threat. Having said that, it's clear that we should continue to monitor its balance sheet, lest it change for the worse. Despite its noteworthy liabilities, Cumberland Pharmaceuticals 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 Cumberland Pharmaceuticals 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, Cumberland Pharmaceuticals reported revenue of US$45m, which is a gain of 9.3%, although it did not report any earnings before interest and tax. We usually like to see faster growth from unprofitable companies, but each to their own.
So How Risky Is Cumberland Pharmaceuticals?
We have no doubt that loss making companies are, in general, riskier than profitable ones. And we do note that Cumberland Pharmaceuticals had negative earnings before interest and tax (EBIT), over the last year. And over the same period it saw negative free cash outflow of US$486k and booked a US$4.5m accounting loss. But the saving grace is the US$10.4m on the balance sheet. That kitty means the company can keep spending for growth for at least two years, at current rates. Summing up, we're a little skeptical of this one, as it seems fairly risky in the absence of free cashflow. For riskier companies like Cumberland Pharmaceuticals I always like to keep an eye on the long term profit and revenue trends. Fortunately, you can click to see our interactive graph of its profit, revenue, and operating cashflow.
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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