David Iben put it well when he said, 'Volatility is not a risk we care about. What we care about is avoiding the 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, Flexion Therapeutics, Inc. (NASDAQ:FLXN) does carry debt. But should shareholders be worried about its use of debt?
When Is Debt A Problem?
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. 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, debt can be an important tool in businesses, particularly capital heavy businesses. The first thing to do when considering how much debt a business uses is to look at its cash and debt together.
What Is Flexion Therapeutics's Net Debt?
As you can see below, Flexion Therapeutics had US$158.0m of debt, at June 2019, which is about the same the year before. You can click the chart for greater detail. However, it does have US$171.6m in cash offsetting this, leading to net cash of US$13.6m.
How Strong Is Flexion Therapeutics's Balance Sheet?
The latest balance sheet data shows that Flexion Therapeutics had liabilities of US$27.1m due within a year, and liabilities of US$163.9m falling due after that. Offsetting this, it had US$171.6m in cash and US$23.1m in receivables that were due within 12 months. So these liquid assets roughly match the total liabilities.
Having regard to Flexion Therapeutics's size, it seems that its liquid assets are well balanced with its total liabilities. So while it's hard to imagine that the US$506.4m company is struggling for cash, we still think it's worth monitoring its balance sheet. Succinctly put, Flexion Therapeutics boasts net cash, so it's fair to say it does not have a heavy debt load! There's no doubt that we learn most about debt from the balance sheet. But ultimately the future profitability of the business will decide if Flexion Therapeutics 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.
Over 12 months, Flexion Therapeutics reported revenue of US$44m, which is a gain of 594%, although it did not report any earnings before interest and tax. That's virtually the hole-in-one of revenue growth!
So How Risky Is Flexion Therapeutics?
Statistically speaking companies that lose money are riskier than those that make money. And the fact is that over the last twelve months Flexion Therapeutics lost money at the earnings before interest and tax (EBIT) line. And over the same period it saw negative free cash outflow of US$158m and booked a US$162m accounting loss. But at least it has US$13.6m on the balance sheet to spend on growth, near-term. Importantly, Flexion Therapeutics'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 Flexion Therapeutics 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.
We aim to bring you long-term focused research analysis driven by fundamental data. Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative material.
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.