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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.' When we think about how risky a company is, we always like to look at its use of debt, since debt overload can lead to ruin. As with many other companies Corbus Pharmaceuticals Holdings, Inc. (NASDAQ:CRBP) makes use of debt. But the real question is whether this debt is making the company risky.
Why Does Debt Bring Risk?
Debt assists a business until the business has trouble paying it off, either with new capital or with free cash flow. 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. 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.
How Much Debt Does Corbus Pharmaceuticals Holdings Carry?
The image below, which you can click on for greater detail, shows that at June 2019 Corbus Pharmaceuticals Holdings had debt of US$99.3k, up from US$83.7k in one year. However, its balance sheet shows it holds US$73.2m in cash, so it actually has US$73.1m net cash.
How Strong Is Corbus Pharmaceuticals Holdings's Balance Sheet?
The latest balance sheet data shows that Corbus Pharmaceuticals Holdings had liabilities of US$29.4m due within a year, and liabilities of US$7.31m falling due after that. Offsetting these obligations, it had cash of US$73.2m as well as receivables valued at US$915.7k due within 12 months. So it can boast US$37.3m more liquid assets than total liabilities.
This short term liquidity is a sign that Corbus Pharmaceuticals Holdings could probably pay off its debt with ease, as its balance sheet is far from stretched. Simply put, the fact that Corbus Pharmaceuticals Holdings has more cash than debt is arguably a good indication that it can manage its debt safely. The balance sheet is clearly the area to focus on when you are analysing debt. But it is future earnings, more than anything, that will determine Corbus Pharmaceuticals Holdings'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, Corbus Pharmaceuticals Holdings reported revenue of US$34m, which is a gain of 1207%. When it comes to revenue growth, that's like nailing the game winning 3-pointer!
So How Risky Is Corbus Pharmaceuticals Holdings?
Statistically speaking companies that lose money are riskier than those that make money. And the fact is that over the last twelve months Corbus Pharmaceuticals Holdings lost money at the earnings before interest and tax (EBIT) line. And over the same period it saw negative free cash outflow of US$30m and booked a US$56m accounting loss. However, it has net cash of US$73m, so it has a bit of time before it will need more capital. The good news for shareholders is that Corbus Pharmaceuticals Holdings 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. 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 Corbus Pharmaceuticals Holdings insider transactions.
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.
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If you spot an error that warrants correction, please contact the editor at firstname.lastname@example.org. 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. Simply Wall St has no position in the stocks mentioned. Thank you for reading.