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.' 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. Importantly, GW Pharmaceuticals plc (NASDAQ:GWPH) does carry debt. But is this debt a concern to shareholders?
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. Ultimately, if the company can't fulfill its legal obligations to repay debt, shareholders could walk away with nothing. 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. When we examine debt levels, we first consider both cash and debt levels, together.
What Is GW Pharmaceuticals's Debt?
As you can see below, GW Pharmaceuticals had US$9.69m of debt at June 2019, down from US$17.0m a year prior. However, it does have US$583.7m in cash offsetting this, leading to net cash of US$574.0m.
How Healthy Is GW Pharmaceuticals's Balance Sheet?
The latest balance sheet data shows that GW Pharmaceuticals had liabilities of US$83.9m due within a year, and liabilities of US$29.9m falling due after that. Offsetting these obligations, it had cash of US$583.7m as well as receivables valued at US$32.1m due within 12 months. So it actually has US$501.9m 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. Simply put, the fact that GW Pharmaceuticals has more cash than debt is arguably a good indication that it can manage its debt safely. 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're focused on the future you can check out this free report showing analyst profit forecasts.
In the last year GW Pharmaceuticals managed to grow its revenue by 674%, to US$132m. When it comes to revenue growth, that's like nailing the game winning 3-pointer!
So How Risky Is GW Pharmaceuticals?
Statistically speaking companies that lose money are riskier than those that make money. And we do note that GW Pharmaceuticals 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$372m and booked a US$104m accounting loss. But at least it has US$584m on the balance sheet to spend on growth, near-term. The good news for shareholders is that GW Pharmaceuticals has dazzling revenue growth, so there's a very good chance it can boost its free cash flow in the years to come. High growth pre-profit companies may well be risky, but they can also offer great rewards. For riskier companies like GW Pharmaceuticals I always like to keep an eye on the long term profit and revenue trends. Fortunately, you can click to see our interactive graph of its profit, revenue, and operating cashflow.
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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