Howard Marks put it nicely when he said that, rather than worrying about share price volatility, 'The possibility of permanent loss is the risk I worry about... and every practical investor I know worries about.' 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. Importantly, PTC Therapeutics, Inc. (NASDAQ:PTCT) does carry debt. But should shareholders be worried about its use of debt?
When Is Debt A Problem?
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 common (but still painful) scenario is that it has to raise new equity capital at a low price, thus permanently diluting shareholders. Of course, plenty of companies use debt to fund growth, without any negative consequences. The first thing to do when considering how much debt a business uses is to look at its cash and debt together.
What Is Therapeutics's Net Debt?
As you can see below, at the end of June 2019, Therapeutics had US$155.7m of debt, up from US$148.9m a year ago. Click the image for more detail. However, its balance sheet shows it holds US$363.5m in cash, so it actually has US$207.9m net cash.
How Healthy Is Therapeutics's Balance Sheet?
According to the last reported balance sheet, Therapeutics had liabilities of US$174.0m due within 12 months, and liabilities of US$628.9m due beyond 12 months. On the other hand, it had cash of US$363.5m and US$77.1m worth of receivables due within a year. So its liabilities total US$362.2m more than the combination of its cash and short-term receivables.
Since publicly traded Therapeutics shares are worth a total of US$2.55b, it seems unlikely that this level of liabilities would be a major threat. Having said that, it's clear that we should continue to monitor its balance sheet, lest it change for the worse. While it does have liabilities worth noting, Therapeutics also has more cash than debt, so we're pretty confident it can manage its debt safely. 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 Therapeutics's ability to maintain a healthy balance sheet going forward. So if you're focused on the future you can check out this free report showing analyst profit forecasts.
Over 12 months, Therapeutics reported revenue of US$279m, which is a gain of 14%. That rate of growth is a bit slow for our taste, but it takes all types to make a world.
So How Risky Is Therapeutics?
Statistically speaking companies that lose money are riskier than those that make money. And in the last year Therapeutics had negative earnings before interest and tax (EBIT), truth be told. Indeed, in that time it burnt through US$116m of cash and made a loss of US$213m. While this does make the company a bit risky, it's important to remember it has net cash of US$364m. That means it could keep spending at its current rate for more than two years. Overall, we'd say the stock is a bit risky, and we're usually very cautious until we see positive free cash flow. 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 Therapeutics 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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