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. We can see that Portola Pharmaceuticals, Inc. (NASDAQ:PTLA) does use debt in its business. But the real question is whether this debt is making the company risky.
When Is Debt A Problem?
Generally speaking, debt only becomes a real problem when a company can't easily pay it off, either by raising capital or with its own cash flow. If things get really bad, the lenders can take control of the business. 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, 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. When we examine debt levels, we first consider both cash and debt levels, together.
What Is Portola Pharmaceuticals's Debt?
You can click the graphic below for the historical numbers, but it shows that as of June 2019 Portola Pharmaceuticals had US$278.7m of debt, an increase on US$206.2m, over one year. However, because it has a cash reserve of US$273.9m, its net debt is less, at about US$4.79m.
How Strong Is Portola Pharmaceuticals's Balance Sheet?
We can see from the most recent balance sheet that Portola Pharmaceuticals had liabilities of US$84.3m falling due within a year, and liabilities of US$281.6m due beyond that. Offsetting this, it had US$273.9m in cash and US$18.8m in receivables that were due within 12 months. So its liabilities total US$73.2m more than the combination of its cash and short-term receivables.
Since publicly traded Portola Pharmaceuticals shares are worth a total of US$2.33b, it seems unlikely that this level of liabilities would be a major threat. But there are sufficient liabilities that we would certainly recommend shareholders continue to monitor the balance sheet, going forward. Carrying virtually no net debt, Portola Pharmaceuticals has a very light debt load indeed. 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 Portola Pharmaceuticals'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.
In the last year Portola Pharmaceuticals managed to grow its revenue by 230%, to US$80m. When it comes to revenue growth, that's like nailing the game winning 3-pointer!
Even though Portola Pharmaceuticals managed to grow its top line quite deftly, the cold hard truth is that it is losing money on the EBIT line. Indeed, it lost a very considerable US$279m at the EBIT level. When we look at that and recall the liabilities on its balance sheet, relative to cash, it seems unwise to us for the company to have any debt. Quite frankly we think the balance sheet is far from match-fit, although it could be improved with time. However, it doesn't help that it burned through US$266m of cash over the last year. So in short it's a really risky stock. 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 Portola Pharmaceuticals insider transactions.
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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