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. When we think about how risky a company is, we always like to look at its use of debt, since debt overload can lead to ruin. Importantly, Liquidia Technologies, Inc. (NASDAQ:LQDA) does carry debt. But the real question is whether this debt is making the company risky.
When Is Debt A Problem?
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. Part and parcel of capitalism is the process of 'creative destruction' where failed businesses are mercilessly liquidated by their bankers. 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. Having said that, the most common situation is where a company manages its debt reasonably well - and to its own advantage. The first thing to do when considering how much debt a business uses is to look at its cash and debt together.
How Much Debt Does Liquidia Technologies Carry?
You can click the graphic below for the historical numbers, but it shows that as of June 2019 Liquidia Technologies had US$15.8m of debt, an increase on US$13.5m, over one year. But it also has US$52.1m in cash to offset that, meaning it has US$36.3m net cash.
How Healthy Is Liquidia Technologies's Balance Sheet?
The latest balance sheet data shows that Liquidia Technologies had liabilities of US$12.3m due within a year, and liabilities of US$20.3m falling due after that. Offsetting these obligations, it had cash of US$52.1m as well as receivables valued at US$604.0k due within 12 months. So it can boast US$20.1m more liquid assets than total liabilities.
This excess liquidity suggests that Liquidia Technologies is taking a careful approach to debt. Due to its strong net asset position, it is not likely to face issues with its lenders. Succinctly put, Liquidia Technologies 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 Liquidia Technologies 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 Liquidia Technologies wasn't profitable at an EBIT level, but managed to grow its revenue by57%, to US$8.8m. With any luck the company will be able to grow its way to profitability.
So How Risky Is Liquidia Technologies?
Statistically speaking companies that lose money are riskier than those that make money. And the fact is that over the last twelve months Liquidia Technologies lost money at the earnings before interest and tax (EBIT) line. Indeed, in that time it burnt through US$38m of cash and made a loss of US$39m. But at least it has US$36.3m on the balance sheet to spend on growth, near-term. With very solid revenue growth in the last year, Liquidia Technologies may be on a path to profitability. By investing before those profits, shareholders take on more risk in the hope of bigger rewards. When we look at a riskier company, we like to check how their profits (or losses) are trending over time. Today, we're providing readers this interactive graph showing how Liquidia Technologies's profit, revenue, and operating cashflow have changed over the last few years.
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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