The external fund manager backed by Berkshire Hathaway's Charlie Munger, Li Lu, makes no bones about it when he says 'The biggest investment risk is not the volatility of prices, but whether you will suffer a permanent loss of capital.' 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, Puma Biotechnology, Inc. (NASDAQ:PBYI) does carry debt. 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. In the worst case scenario, a company can go bankrupt if it cannot pay its creditors. 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. 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 Puma Biotechnology Carry?
As you can see below, Puma Biotechnology had US$93.4m of debt at June 2019, down from US$120.3m a year prior. But it also has US$117.7m in cash to offset that, meaning it has US$24.2m net cash.
How Healthy Is Puma Biotechnology's Balance Sheet?
The latest balance sheet data shows that Puma Biotechnology had liabilities of US$91.7m due within a year, and liabilities of US$126.4m falling due after that. Offsetting this, it had US$117.7m in cash and US$25.3m in receivables that were due within 12 months. So its liabilities total US$75.1m more than the combination of its cash and short-term receivables.
Of course, Puma Biotechnology has a market capitalization of US$421.6m, so these liabilities are probably manageable. However, we do think it is worth keeping an eye on its balance sheet strength, as it may change over time. While it does have liabilities worth noting, Puma Biotechnology also has more cash than debt, so we're pretty confident 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 Puma Biotechnology 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, Puma Biotechnology reported revenue of US$287m, which is a gain of 98%. Shareholders probably have their fingers crossed that it can grow its way to profits.
So How Risky Is Puma Biotechnology?
Although Puma Biotechnology had negative earnings before interest and tax (EBIT) over the last twelve months, it generated positive free cash flow of US$28m. So taking that on face value, and considering the net cash situation, we don't think that the stock is too risky in the near term. One positive is that Puma Biotechnology is growing revenue apace, which makes it easier to sell a growth story and raise capital if need be. But that doesn't change our opinion that the stock is risky. When I consider a company to be a bit risky, I think it is responsible to check out whether insiders have been reporting any share sales. Luckily, you can click here ito see our graphic depicting Puma Biotechnology insider transactions.
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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If you spot an error that warrants correction, please contact the editor at firstname.lastname@example.org. This article by Simply Wall St is general in nature. It does not constitute a recommendation to buy or sell any stock, and does not take account of your objectives, or your financial situation. Simply Wall St has no position in the stocks mentioned. Thank you for reading.