Is scPharmaceuticals (NASDAQ:SCPH) Using Debt In A Risky Way?
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.' 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 scPharmaceuticals Inc. (NASDAQ:SCPH) does have debt on its balance sheet. But the more important question is: how much risk is that debt creating?
What Risk Does Debt Bring?
Generally speaking, debt only becomes a real problem when a company can't easily pay it off, either by raising capital or with its own cash flow. 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. Of course, debt can be an important tool in businesses, particularly capital heavy businesses. When we examine debt levels, we first consider both cash and debt levels, together.
View our latest analysis for scPharmaceuticals
What Is scPharmaceuticals's Debt?
As you can see below, scPharmaceuticals had US$19.6m of debt, at September 2021, which is about the same as the year before. You can click the chart for greater detail. However, it does have US$84.8m in cash offsetting this, leading to net cash of US$65.3m.
How Healthy Is scPharmaceuticals' Balance Sheet?
Zooming in on the latest balance sheet data, we can see that scPharmaceuticals had liabilities of US$14.2m due within 12 months and liabilities of US$10.2m due beyond that. On the other hand, it had cash of US$84.8m and US$112.0k worth of receivables due within a year. So it can boast US$60.5m more liquid assets than total liabilities.
This excess liquidity is a great indication that scPharmaceuticals' balance sheet is almost as strong as Fort Knox. Having regard to this fact, we think its balance sheet is as strong as an ox. Simply put, the fact that scPharmaceuticals has more cash than debt is arguably a good indication that it can manage its debt safely. 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 scPharmaceuticals 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.
Given it has no significant operating revenue at the moment, shareholders will be hoping scPharmaceuticals can make progress and gain better traction for the business, before it runs low on cash.
So How Risky Is scPharmaceuticals?
We have no doubt that loss making companies are, in general, riskier than profitable ones. And we do note that scPharmaceuticals had an earnings before interest and tax (EBIT) loss, over the last year. Indeed, in that time it burnt through US$29m of cash and made a loss of US$29m. But at least it has US$65.3m on the balance sheet to spend on growth, near-term. Even though its balance sheet seems sufficiently liquid, debt always makes us a little nervous if a company doesn't produce free cash flow regularly. When analysing debt levels, the balance sheet is the obvious place to start. But ultimately, every company can contain risks that exist outside of the balance sheet. For instance, we've identified 3 warning signs for scPharmaceuticals (1 is significant) 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. We provide commentary based on historical data and analyst forecasts only using an unbiased methodology and our articles are not intended to be financial advice. 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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