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. Importantly, Cytosorbents Corporation (NASDAQ:CTSO) does carry debt. But is this debt a concern to shareholders?
When Is Debt Dangerous?
Debt is a tool to help businesses grow, but if a business is incapable of paying off its lenders, then it exists at their mercy. In the worst case scenario, a company can go bankrupt if it cannot pay its creditors. 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. Of course, plenty of companies use debt to fund growth, without any negative consequences. The first step when considering a company's debt levels is to consider its cash and debt together.
What Is Cytosorbents's Debt?
The chart below, which you can click on for greater detail, shows that Cytosorbents had US$9.99m in debt in June 2019; about the same as the year before. However, it does have US$16.3m in cash offsetting this, leading to net cash of US$6.35m.
A Look At Cytosorbents's Liabilities
Zooming in on the latest balance sheet data, we can see that Cytosorbents had liabilities of US$6.92m due within 12 months and liabilities of US$10.0m due beyond that. On the other hand, it had cash of US$16.3m and US$3.45m worth of receivables due within a year. So it can boast US$2.85m more liquid assets than total liabilities.
This state of affairs indicates that Cytosorbents's balance sheet looks quite solid, as its total liabilities are just about equal to its liquid assets. So while it's hard to imagine that the US$163.1m company is struggling for cash, we still think it's worth monitoring its balance sheet. Succinctly put, Cytosorbents 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 Cytosorbents 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, Cytosorbents reported revenue of US$23m, which is a gain of 21%, 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 Cytosorbents?
We have no doubt that loss making companies are, in general, riskier than profitable ones. And we do note that Cytosorbents had negative earnings before interest and tax (EBIT), over the last year. Indeed, in that time it burnt through US$14m of cash and made a loss of US$17m. But at least it has US$6.35m on the balance sheet to spend on growth, near-term. With very solid revenue growth in the last year, Cytosorbents may be on a path to profitability. Pre-profit companies are often risky, but they can also offer great rewards. For riskier companies like Cytosorbents I always like to keep an eye on whether insiders are buying or selling. So click here if you want to find out for yourself.
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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