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 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 Retrophin, Inc. (NASDAQ:RTRX) does have debt on its balance sheet. But the more important question is: how much risk is that debt creating?
Why Does Debt Bring Risk?
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. 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. The first thing to do when considering how much debt a business uses is to look at its cash and debt together.
What Is Retrophin's Debt?
The image below, which you can click on for greater detail, shows that at March 2019 Retrophin had debt of US$220.0m, up from US$45.2m in one year. However, it does have US$447.6m in cash offsetting this, leading to net cash of US$227.6m.
How Strong Is Retrophin's Balance Sheet?
We can see from the most recent balance sheet that Retrophin had liabilities of US$104.1m falling due within a year, and liabilities of US$277.9m due beyond that. On the other hand, it had cash of US$447.6m and US$12.7m worth of receivables due within a year. So it actually has US$78.4m more liquid assets than total liabilities.
This surplus suggests that Retrophin has a conservative balance sheet, and could probably eliminate its debt without much difficulty. Succinctly put, Retrophin 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 Retrophin 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, Retrophin reported revenue of US$165m, which is a gain of 3.5%. That rate of growth is a bit slow for our taste, but it takes all types to make a world.
So How Risky Is Retrophin?
Statistically speaking companies that lose money are riskier than those that make money. And we do note that Retrophin had negative earnings before interest and tax (EBIT), over the last year. Indeed, in that time it burnt through US$46m of cash and made a loss of US$125m. While this does make the company a bit risky, it's important to remember it has net cash of US$448m. That means it could keep spending at its current rate for more than five years. Overall, its balance sheet doesn't seem overly risky, at the moment, but we're always cautious until we see the positive free cash flow. 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 Retrophin'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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