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. As with many other companies Lipocine Inc. (NASDAQ:LPCN) makes use of debt. 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 common (but still painful) scenario is that it has to raise new equity capital at a low price, thus permanently diluting shareholders. 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 examine debt levels, we first consider both cash and debt levels, together.
What Is Lipocine's Net Debt?
The image below, which you can click on for greater detail, shows that Lipocine had debt of US$8.72m at the end of June 2019, a reduction from US$10.1m over a year. But it also has US$14.5m in cash to offset that, meaning it has US$5.76m net cash.
How Strong Is Lipocine's Balance Sheet?
According to the last reported balance sheet, Lipocine had liabilities of US$4.44m due within 12 months, and liabilities of US$5.38m due beyond 12 months. Offsetting this, it had US$14.5m in cash and US$15.6k in receivables that were due within 12 months. So it can boast US$4.67m more liquid assets than total liabilities.
This surplus suggests that Lipocine has a conservative balance sheet, and could probably eliminate its debt without much difficulty. Simply put, the fact that Lipocine 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 ultimately the future profitability of the business will decide if Lipocine 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.
It seems likely shareholders hope that Lipocine can significantly advance the business plan before too long, because it doesn't have any significant revenue at the moment.
So How Risky Is Lipocine?
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 Lipocine had negative earnings before interest and tax (EBIT), truth be told. And over the same period it saw negative free cash outflow of US$11m and booked a US$12m accounting loss. However, it has net cash of US$14m, so it has a bit of time before it will need more capital. Even though its balance sheet seems sufficiently liquid, debt always makes us a little nervous if a company doesn't produce free cash flow regularly. For riskier companies like Lipocine 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.
Of course, if you're the type of investor who prefers buying stocks without the burden of debt, then don't hesitate to discover our exclusive list of net cash growth stocks, today.
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