Warren Buffett famously said, '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. As with many other companies Dermira, Inc. (NASDAQ:DERM) makes use of debt. But the real question is whether this debt is making the company risky.
When Is Debt A Problem?
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 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, 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. The first step when considering a company's debt levels is to consider its cash and debt together.
What Is Dermira's Net Debt?
As you can see below, at the end of September 2019, Dermira had US$354.4m of debt, up from US$280.8m a year ago. Click the image for more detail. However, its balance sheet shows it holds US$358.1m in cash, so it actually has US$3.72m net cash.
A Look At Dermira's Liabilities
We can see from the most recent balance sheet that Dermira had liabilities of US$58.6m falling due within a year, and liabilities of US$363.1m due beyond that. Offsetting these obligations, it had cash of US$358.1m as well as receivables valued at US$11.1m due within 12 months. So its liabilities outweigh the sum of its cash and (near-term) receivables by US$52.6m.
Given Dermira has a market capitalization of US$495.6m, it's hard to believe these liabilities pose much threat. But there are sufficient liabilities that we would certainly recommend shareholders continue to monitor the balance sheet, going forward. While it does have liabilities worth noting, Dermira also has more cash than debt, so we're pretty confident it can manage its debt safely. There's no doubt that we learn most about debt from the balance sheet. But ultimately the future profitability of the business will decide if Dermira 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, Dermira reported revenue of US$83m, which is a gain of 100%, although it did not report any earnings before interest and tax. Shareholders probably have their fingers crossed that it can grow its way to profits.
So How Risky Is Dermira?
Statistically speaking companies that lose money are riskier than those that make money. And we do note that Dermira 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$245m and booked a US$212m accounting loss. But at least it has US$3.72m on the balance sheet to spend on growth, near-term. Dermira's revenue growth shone bright over the last year, so it may well be in a position to turn a profit in due course. Pre-profit companies are often risky, but they can also offer great 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 Dermira insider transactions.
If, after all that, you're more interested in a fast growing company with a rock-solid balance sheet, then check out our list of net cash growth stocks without delay.
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