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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.' It's only natural to consider a company's balance sheet when you examine how risky it is, since debt is often involved when a business collapses. We note that Revance Therapeutics, Inc. (NASDAQ:RVNC) does have debt on its balance sheet. But is this debt a concern to shareholders?
Why Does Debt Bring Risk?
Debt assists a business until the business has trouble paying it off, either with new capital or with free cash flow. In the worst case scenario, a company can go bankrupt if it cannot pay its creditors. 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. Of course, plenty of companies use debt to fund growth, without any negative consequences. When we think about a company's use of debt, we first look at cash and debt together.
How Much Debt Does Revance Therapeutics Carry?
You can click the graphic below for the historical numbers, but it shows that as of December 2020 Revance Therapeutics had US$180.5m of debt, an increase on none, over one year. However, it does have US$436.5m in cash offsetting this, leading to net cash of US$256.0m.
How Strong Is Revance Therapeutics' Balance Sheet?
We can see from the most recent balance sheet that Revance Therapeutics had liabilities of US$61.0m falling due within a year, and liabilities of US$285.0m due beyond that. Offsetting this, it had US$436.5m in cash and US$1.83m in receivables that were due within 12 months. So it can boast US$92.4m more liquid assets than total liabilities.
This short term liquidity is a sign that Revance Therapeutics could probably pay off its debt with ease, as its balance sheet is far from stretched. Succinctly put, Revance Therapeutics boasts net cash, so it's fair to say it does not have a heavy debt load! There's no doubt that we learn most about debt from the balance sheet. But it is future earnings, more than anything, that will determine Revance Therapeutics's ability to maintain a healthy balance sheet going forward. 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, Revance Therapeutics reported revenue of US$15m, which is a gain of 3,633%, although it did not report any earnings before interest and tax. That's virtually the hole-in-one of revenue growth!
So How Risky Is Revance Therapeutics?
By their very nature companies that are losing money are more risky than those with a long history of profitability. And we do note that Revance Therapeutics had an earnings before interest and tax (EBIT) loss, over the last year. Indeed, in that time it burnt through US$183m of cash and made a loss of US$282m. But the saving grace is the US$256.0m on the balance sheet. That means it could keep spending at its current rate for more than two years. Importantly, Revance Therapeutics's revenue growth is hot to trot. While unprofitable companies can be risky, they can also grow hard and fast in those pre-profit years. 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. Case in point: We've spotted 2 warning signs for Revance Therapeutics you should be aware of.
When all is said and done, sometimes its easier to focus on companies that don't even need debt. Readers can access a list of growth stocks with zero net debt 100% free, right now.
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. 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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