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Howard Marks put it nicely when he said that, rather than worrying about share price volatility, 'The possibility of permanent loss is the risk I worry about... and every practical investor I know worries about. 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, Coherus BioSciences, Inc. (NASDAQ:CHRS) does carry debt. But is this debt a concern to shareholders?
Why Does Debt Bring Risk?
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. However, a more frequent (but still costly) occurrence is where a company must issue shares at bargain-basement prices, permanently diluting shareholders, just to shore up its balance sheet. Of course, debt can be an important tool in businesses, particularly capital heavy businesses. When we think about a company's use of debt, we first look at cash and debt together.
How Much Debt Does Coherus BioSciences Carry?
As you can see below, Coherus BioSciences had US$179.0m of debt, at March 2020, which is about the same as the year before. You can click the chart for greater detail. But on the other hand it also has US$193.3m in cash, leading to a US$14.2m net cash position.
A Look At Coherus BioSciences's Liabilities
According to the last reported balance sheet, Coherus BioSciences had liabilities of US$119.0m due within 12 months, and liabilities of US$190.3m due beyond 12 months. Offsetting this, it had US$193.3m in cash and US$167.5m in receivables that were due within 12 months. So it can boast US$51.4m more liquid assets than total liabilities.
This short term liquidity is a sign that Coherus BioSciences could probably pay off its debt with ease, as its balance sheet is far from stretched. Simply put, the fact that Coherus BioSciences has more cash than debt is arguably a good indication that it can manage its debt safely.
It was also good to see that despite losing money on the EBIT line last year, Coherus BioSciences turned things around in the last 12 months, delivering and EBIT of US$165m. 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 Coherus BioSciences's ability to maintain a healthy balance sheet going forward. So if you want to see what the professionals think, you might find this free report on analyst profit forecasts to be interesting.
Finally, a company can only pay off debt with cold hard cash, not accounting profits. Coherus BioSciences may have net cash on the balance sheet, but it is still interesting to look at how well the business converts its earnings before interest and tax (EBIT) to free cash flow, because that will influence both its need for, and its capacity to manage debt. Over the most recent year, Coherus BioSciences recorded free cash flow worth 51% of its EBIT, which is around normal, given free cash flow excludes interest and tax. This cold hard cash means it can reduce its debt when it wants to.
While we empathize with investors who find debt concerning, you should keep in mind that Coherus BioSciences has net cash of US$14.2m, as well as more liquid assets than liabilities. So we are not troubled with Coherus BioSciences's debt use. The balance sheet is clearly the area to focus on when you are analysing debt. However, not all investment risk resides within the balance sheet - far from it. Consider for instance, the ever-present spectre of investment risk. We've identified 4 warning signs with Coherus BioSciences (at least 1 which makes us a bit uncomfortable) , and understanding them should be part of your investment process.
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.
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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