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 note that Liminal BioSciences Inc. (TSE:LMNL) does have debt on its balance sheet. But the real question is whether this debt is making the company risky.
What Risk Does Debt Bring?
Debt is a tool to help businesses grow, but if a business is incapable of paying off its lenders, then it exists at their mercy. 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. By replacing dilution, though, debt can be an extremely good tool for businesses that need capital to invest in growth at high rates of return. When we think about a company's use of debt, we first look at cash and debt together.
What Is Liminal BioSciences's Debt?
The image below, which you can click on for greater detail, shows that Liminal BioSciences had debt of CA$9.02m at the end of September 2019, a reduction from CA$152.7m over a year. But it also has CA$60.4m in cash to offset that, meaning it has CA$51.3m net cash.
How Strong Is Liminal BioSciences's Balance Sheet?
The latest balance sheet data shows that Liminal BioSciences had liabilities of CA$29.7m due within a year, and liabilities of CA$46.0m falling due after that. On the other hand, it had cash of CA$60.4m and CA$13.5m worth of receivables due within a year. So its liabilities outweigh the sum of its cash and (near-term) receivables by CA$1.81m.
Having regard to Liminal BioSciences's size, it seems that its liquid assets are well balanced with its total liabilities. So while it's hard to imagine that the CA$198.2m company is struggling for cash, we still think it's worth monitoring its balance sheet. Despite its noteworthy liabilities, Liminal BioSciences boasts net cash, so it's fair to say it does not have a heavy debt load! The balance sheet is clearly the area to focus on when you are analysing debt. But ultimately the future profitability of the business will decide if Liminal BioSciences can strengthen its balance sheet over time. So if you want to see what the professionals think, you might find this free report on analyst profit forecasts to be interesting.
Over 12 months, Liminal BioSciences made a loss at the EBIT level, and saw its revenue drop to CA$33m, which is a fall of 24%. To be frank that doesn't bode well.
So How Risky Is Liminal BioSciences?
Statistically speaking companies that lose money are riskier than those that make money. And the fact is that over the last twelve months Liminal BioSciences lost money at the earnings before interest and tax (EBIT) line. And over the same period it saw negative free cash outflow of CA$95m and booked a CA$294m accounting loss. With only CA$51.3m on the balance sheet, it would appear that its going to need to raise capital again soon. Overall, we'd say the stock is a bit risky, and we're usually very cautious until we see positive free cash flow. For riskier companies like Liminal BioSciences I always like to keep an eye on whether insiders are buying or selling. So click here if you want to find out for yourself.
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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