Does Kala Pharmaceuticals (NASDAQ:KALA) Have A Healthy Balance Sheet?
Legendary fund manager Li Lu (who Charlie Munger backed) once said, '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 Kala Pharmaceuticals, Inc. (NASDAQ:KALA) does use debt in its business. But is this debt a concern to shareholders?
When Is Debt A Problem?
Debt assists a business until the business has trouble paying it off, either with new capital or with free cash flow. In the worst case scenario, a company can go bankrupt if it cannot pay its creditors. 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. When we examine debt levels, we first consider both cash and debt levels, together.
View our latest analysis for Kala Pharmaceuticals
How Much Debt Does Kala Pharmaceuticals Carry?
The chart below, which you can click on for greater detail, shows that Kala Pharmaceuticals had US$72.5m in debt in March 2021; about the same as the year before. However, it does have US$156.0m in cash offsetting this, leading to net cash of US$83.5m.
How Healthy Is Kala Pharmaceuticals' Balance Sheet?
We can see from the most recent balance sheet that Kala Pharmaceuticals had liabilities of US$20.0m falling due within a year, and liabilities of US$100.0m due beyond that. Offsetting this, it had US$156.0m in cash and US$12.2m in receivables that were due within 12 months. So it actually has US$48.2m more liquid assets than total liabilities.
This surplus suggests that Kala Pharmaceuticals is using debt in a way that is appears to be both safe and conservative. Due to its strong net asset position, it is not likely to face issues with its lenders. Succinctly put, Kala Pharmaceuticals boasts net cash, so it's fair to say it does not have a heavy debt load! When analysing debt levels, the balance sheet is the obvious place to start. But ultimately the future profitability of the business will decide if Kala 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.
In the last year Kala Pharmaceuticals wasn't profitable at an EBIT level, but managed to grow its revenue by 49%, to US$8.6m. Shareholders probably have their fingers crossed that it can grow its way to profits.
So How Risky Is Kala Pharmaceuticals?
We have no doubt that loss making companies are, in general, riskier than profitable ones. And we do note that Kala Pharmaceuticals had an earnings before interest and tax (EBIT) loss, over the last year. Indeed, in that time it burnt through US$105m of cash and made a loss of US$113m. But at least it has US$83.5m on the balance sheet to spend on growth, near-term. Kala Pharmaceuticals'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. There's no doubt that we learn most about debt from the balance sheet. But ultimately, every company can contain risks that exist outside of the balance sheet. To that end, you should be aware of the 2 warning signs we've spotted with Kala Pharmaceuticals .
If you're interested in investing in businesses that can grow profits without the burden of debt, then check out this free list of growing businesses that have net cash on the balance sheet.
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. We aim to bring you long-term focused analysis driven by fundamental data. Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative material. Simply Wall St has no position in any stocks mentioned.
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