Warren Buffett famously said, 'Volatility is far from synonymous with risk.' 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, GW Pharmaceuticals plc (NASDAQ:GWPH) does carry 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. Ultimately, if the company can't fulfill its legal obligations to repay debt, shareholders could walk away with nothing. However, a more usual (but still expensive) situation is where a company must dilute shareholders at a cheap share price simply to get debt under control. 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 thing to do when considering how much debt a business uses is to look at its cash and debt together.
How Much Debt Does GW Pharmaceuticals Carry?
As you can see below, GW Pharmaceuticals had US$9.27m of debt at September 2019, down from US$14.7m a year prior. But it also has US$554.7m in cash to offset that, meaning it has US$545.4m net cash.
How Healthy Is GW Pharmaceuticals's Balance Sheet?
We can see from the most recent balance sheet that GW Pharmaceuticals had liabilities of US$95.3m falling due within a year, and liabilities of US$32.9m due beyond that. Offsetting these obligations, it had cash of US$554.7m as well as receivables valued at US$41.8m due within 12 months. So it can boast US$468.3m 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. 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 GW Pharmaceuticals'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.
In the last year GW Pharmaceuticals wasn't profitable at an EBIT level, but managed to grow its revenue by 1628%, to US$220m. When it comes to revenue growth, that's like nailing the game winning 3-pointer!
So How Risky Is GW Pharmaceuticals?
We have no doubt that loss making companies are, in general, riskier than profitable ones. And in the last year GW Pharmaceuticals had negative earnings before interest and tax (EBIT), truth be told. And over the same period it saw negative free cash outflow of US$306m and booked a US$38m accounting loss. But at least it has US$545.4m on the balance sheet to spend on growth, near-term. Importantly, GW Pharmaceuticals's revenue growth is hot to trot. High growth pre-profit companies may well be 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. For instance, we've identified 1 warning sign for GW Pharmaceuticals that you should be aware of.
When all is said and done, sometimes its easier to focus on companies that don't even need debt. Readers can access a list of growth stocks with zero net debt 100% free, right now.
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