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Warren Buffett famously said, 'Volatility is far from synonymous with risk.' 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. As with many other companies GW Pharmaceuticals plc (NASDAQ:GWPH) makes use of debt. But the more important question is: how much risk is that debt creating?
What Risk Does Debt Bring?
Debt and other liabilities become risky for a business when it cannot easily fulfill those obligations, either with free cash flow or by raising capital at an attractive price. If things get really bad, the lenders can take control of the business. However, a more common (but still painful) scenario is that it has to raise new equity capital at a low price, thus permanently diluting shareholders. Having said that, the most common situation is where a company manages its debt reasonably well - and to its own advantage. The first thing to do when considering how much debt a business uses is to look at its cash and debt together.
What Is GW Pharmaceuticals's Debt?
As you can see below, GW Pharmaceuticals had US$9.51m of debt, at December 2020, which is about the same as the year before. You can click the chart for greater detail. However, it does have US$486.8m in cash offsetting this, leading to net cash of US$477.2m.
A Look At GW Pharmaceuticals' Liabilities
According to the last reported balance sheet, GW Pharmaceuticals had liabilities of US$159.8m due within 12 months, and liabilities of US$38.6m due beyond 12 months. Offsetting these obligations, it had cash of US$486.8m as well as receivables valued at US$71.2m due within 12 months. So it can boast US$359.5m more liquid assets than total liabilities.
This surplus suggests that GW Pharmaceuticals has a conservative balance sheet, and could probably eliminate its debt without much difficulty. Succinctly put, GW 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 GW 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 GW Pharmaceuticals wasn't profitable at an EBIT level, but managed to grow its revenue by 69%, to US$527m. With any luck the company will be able to grow its way to profitability.
So How Risky Is GW Pharmaceuticals?
By their very nature companies that are losing money are more risky than those with a long history of profitability. And the fact is that over the last twelve months GW Pharmaceuticals lost money at the earnings before interest and tax (EBIT) line. Indeed, in that time it burnt through US$55m of cash and made a loss of US$58m. With only US$477.2m on the balance sheet, it would appear that its going to need to raise capital again soon. GW 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. We've identified 1 warning sign with GW Pharmaceuticals , and understanding them should be part of your investment process.
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.
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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