Some say volatility, rather than debt, is the best way to think about risk as an investor, but Warren Buffett famously said that 'Volatility is far from synonymous with risk.' So it might be obvious that you need to consider debt, when you think about how risky any given stock is, because too much debt can sink a company. We note that Liquidia Corporation (NASDAQ:LQDA) does have debt on its balance sheet. But is this debt a concern to shareholders?
When Is Debt Dangerous?
Debt assists a business until the business has trouble paying it off, either with new capital or with free 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. Of course, debt can be an important tool in businesses, particularly capital heavy businesses. When we think about a company's use of debt, we first look at cash and debt together.
What Is Liquidia's Net Debt?
You can click the graphic below for the historical numbers, but it shows that Liquidia had US$10.3m of debt in June 2021, down from US$13.1m, one year before. However, it does have US$67.9m in cash offsetting this, leading to net cash of US$57.6m.
How Healthy Is Liquidia's Balance Sheet?
The latest balance sheet data shows that Liquidia had liabilities of US$6.97m due within a year, and liabilities of US$18.4m falling due after that. Offsetting these obligations, it had cash of US$67.9m as well as receivables valued at US$2.99m due within 12 months. So it actually has US$45.5m more liquid assets than total liabilities.
It's good to see that Liquidia has plenty of liquidity on its balance sheet, suggesting conservative management of liabilities. Because it has plenty of assets, it is unlikely to have trouble with its lenders. Succinctly put, Liquidia boasts net cash, so it's fair to say it does not have a heavy debt load! When analysing debt levels, the balance sheet is the obvious place to start. But it is future earnings, more than anything, that will determine Liquidia'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.
While it hasn't made a profit, at least Liquidia booked its first revenue as a publicly listed company, in the last twelve months.
So How Risky Is Liquidia?
We have no doubt that loss making companies are, in general, riskier than profitable ones. And in the last year Liquidia had an earnings before interest and tax (EBIT) loss, truth be told. Indeed, in that time it burnt through US$47m of cash and made a loss of US$47m. With only US$57.6m on the balance sheet, it would appear that its going to need to raise capital again soon. 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. There's no doubt that we learn most about debt from the balance sheet. However, not all investment risk resides within the balance sheet - far from it. For instance, we've identified 3 warning signs for Liquidia that you should be aware of.
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.
This article by Simply Wall St is general in nature. We provide commentary based on historical data and analyst forecasts only using an unbiased methodology and our articles are not intended to be financial advice. It does not constitute a recommendation to buy or sell any stock, and does not take account of your objectives, or your financial situation. We aim to bring you long-term focused analysis driven by fundamental data. Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative material. Simply Wall St has no position in any stocks mentioned.
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