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. It's only natural to consider a company's balance sheet when you examine how risky it is, since debt is often involved when a business collapses. Importantly, Rigel Pharmaceuticals, Inc. (NASDAQ:RIGL) does carry debt. But should shareholders be worried about its use of debt?
What Risk Does Debt Bring?
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. If things get really bad, the lenders can take control of the business. 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. By replacing dilution, though, debt can be an extremely good tool for businesses that need capital to invest in growth at high rates of return. The first step when considering a company's debt levels is to consider its cash and debt together.
How Much Debt Does Rigel Pharmaceuticals Carry?
As you can see below, at the end of September 2019, Rigel Pharmaceuticals had US$9.79m of debt, up from none a year ago. Click the image for more detail. But on the other hand it also has US$107.5m in cash, leading to a US$97.7m net cash position.
How Strong Is Rigel Pharmaceuticals's Balance Sheet?
The latest balance sheet data shows that Rigel Pharmaceuticals had liabilities of US$31.0m due within a year, and liabilities of US$56.1m falling due after that. Offsetting this, it had US$107.5m in cash and US$11.6m in receivables that were due within 12 months. So it actually has US$31.9m more liquid assets than total liabilities.
This surplus suggests that Rigel Pharmaceuticals has a conservative balance sheet, and could probably eliminate its debt without much difficulty. Succinctly put, Rigel 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 it is future earnings, more than anything, that will determine Rigel Pharmaceuticals'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.
Over 12 months, Rigel Pharmaceuticals reported revenue of US$82m, which is a gain of 1129%, although it did not report any earnings before interest and tax. When it comes to revenue growth, that's like nailing the game winning 3-pointer!
So How Risky Is Rigel Pharmaceuticals?
By their very nature companies that are losing money are more risky than those with a long history of profitability. And in the last year Rigel Pharmaceuticals had negative earnings before interest and tax (EBIT), truth be told. And over the same period it saw negative free cash outflow of US$21m and booked a US$46m accounting loss. But the saving grace is the US$97.7m on the balance sheet. That kitty means the company can keep spending for growth for at least two years, at current rates. Importantly, Rigel Pharmaceuticals's revenue growth is hot to trot. While unprofitable companies can be risky, they can also grow hard and fast in those pre-profit years. 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 Rigel Pharmaceuticals insider transactions.
At the end of the day, it's often better to focus on companies that are free from net debt. You can access our special list of such companies (all with a track record of profit growth). It's free.
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