Warren Buffett famously said, 'Volatility is far from synonymous with risk.' 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 can see that Recro Pharma, Inc. (NASDAQ:REPH) does use debt in its business. But is this debt a concern to shareholders?
When Is Debt Dangerous?
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. Ultimately, if the company can't fulfill its legal obligations to repay debt, shareholders could walk away with nothing. However, a more usual (but still expensive) situation is where a company must dilute shareholders at a cheap share price simply to get debt under control. Having said that, the most common situation is where a company manages its debt reasonably well - and to its own advantage. The first step when considering a company's debt levels is to consider its cash and debt together.
What Is Recro Pharma's Debt?
As you can see below, at the end of March 2019, Recro Pharma had US$105.9m of debt, up from US$54.0m a year ago. Click the image for more detail. On the flip side, it has US$58.0m in cash leading to net debt of about US$47.9m.
A Look At Recro Pharma's Liabilities
Zooming in on the latest balance sheet data, we can see that Recro Pharma had liabilities of US$26.5m due within 12 months and liabilities of US$173.5m due beyond that. Offsetting these obligations, it had cash of US$58.0m as well as receivables valued at US$21.3m due within 12 months. So its liabilities total US$120.7m more than the combination of its cash and short-term receivables.
While this might seem like a lot, it is not so bad since Recro Pharma has a market capitalization of US$217.2m, and so it could probably strengthen its balance sheet by raising capital if it needed to. But it's clear that we should definitely closely examine whether it can manage its debt without dilution. When analysing debt levels, the balance sheet is the obvious place to start. But ultimately the future profitability of the business will decide if Recro Pharma 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 Recro Pharma managed to grow its revenue by 14%, to US$83m. That rate of growth is a bit slow for our taste, but it takes all types to make a world.
Over the last twelve months Recro Pharma produced an earnings before interest and tax (EBIT) loss. Indeed, it lost a very considerable US$49m at the EBIT level. Considering that alongside the liabilities mentioned above does not give us much confidence that company should be using so much debt. So we think its balance sheet is a little strained, though not beyond repair. Another cause for caution is that is bled US$53m in negative free cash flow over the last twelve months. So suffice it to say we consider the stock very risky. 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 Recro Pharma'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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