Is Intercept Pharmaceuticals (NASDAQ:ICPT) Using Debt In A Risky Way?
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. 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 Intercept Pharmaceuticals, Inc. (NASDAQ:ICPT) does use debt in its business. But the real question is whether this debt is making the company risky.
When Is Debt Dangerous?
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. 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, 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 think about a company's use of debt, we first look at cash and debt together.
See our latest analysis for Intercept Pharmaceuticals
What Is Intercept Pharmaceuticals's Debt?
The image below, which you can click on for greater detail, shows that at September 2019 Intercept Pharmaceuticals had debt of US$525.3m, up from US$367.2m in one year. But on the other hand it also has US$712.4m in cash, leading to a US$187.0m net cash position.
A Look At Intercept Pharmaceuticals's Liabilities
Zooming in on the latest balance sheet data, we can see that Intercept Pharmaceuticals had liabilities of US$140.0m due within 12 months and liabilities of US$531.4m due beyond that. On the other hand, it had cash of US$712.4m and US$32.8m worth of receivables due within a year. So it can boast US$73.8m more liquid assets than total liabilities.
This surplus suggests that Intercept Pharmaceuticals has a conservative balance sheet, and could probably eliminate its debt without much difficulty. Simply put, the fact that Intercept Pharmaceuticals has more cash than debt is arguably a good indication that it can manage its debt safely. When analysing debt levels, the balance sheet is the obvious place to start. But ultimately the future profitability of the business will decide if Intercept Pharmaceuticals 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.
In the last year Intercept Pharmaceuticals wasn't profitable at an EBIT level, but managed to grow its revenue by42%, to US$234m. Shareholders probably have their fingers crossed that it can grow its way to profits.
So How Risky Is Intercept Pharmaceuticals?
By their very nature companies that are losing money are more risky than those with a long history of profitability. And in the last year Intercept Pharmaceuticals had negative earnings before interest and tax (EBIT), truth be told. Indeed, in that time it burnt through US$230m of cash and made a loss of US$335m. But the saving grace is the US$187.0m on the balance sheet. That means it could keep spending at its current rate for more than two years. With very solid revenue growth in the last year, Intercept Pharmaceuticals may be on a path to profitability. By investing before those profits, shareholders take on more risk in the hope of bigger rewards. For riskier companies like Intercept Pharmaceuticals I always like to keep an eye on the long term profit and revenue trends. Fortunately, you can click to see our interactive graph of its profit, revenue, and operating cashflow.
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.
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