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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.' When we think about how risky a company is, we always like to look at its use of debt, since debt overload can lead to ruin. We can see that PTC Therapeutics, Inc. (NASDAQ:PTCT) does use debt in its business. But the more important question is: how much risk is that debt creating?
When Is Debt A Problem?
Debt assists a business until the business has trouble paying it off, either with new capital or with free cash flow. Part and parcel of capitalism is the process of 'creative destruction' where failed businesses are mercilessly liquidated by their bankers. 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 Therapeutics's Debt?
As you can see below, Therapeutics had US$431.0m of debt at September 2021, down from US$967.2m a year prior. However, it does have US$867.9m in cash offsetting this, leading to net cash of US$437.0m.
A Look At Therapeutics' Liabilities
According to the last reported balance sheet, Therapeutics had liabilities of US$465.3m due within 12 months, and liabilities of US$1.44b due beyond 12 months. Offsetting this, it had US$867.9m in cash and US$96.6m in receivables that were due within 12 months. So it has liabilities totalling US$937.8m more than its cash and near-term receivables, combined.
This deficit isn't so bad because Therapeutics is worth US$2.92b, and thus could probably raise enough capital to shore up its balance sheet, if the need arose. But it's clear that we should definitely closely examine whether it can manage its debt without dilution. 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 ultimately the future profitability of the business will decide if Therapeutics 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 Therapeutics wasn't profitable at an EBIT level, but managed to grow its revenue by 37%, to US$492m. With any luck the company will be able to grow its way to profitability.
So How Risky Is Therapeutics?
By their very nature companies that are losing money are more risky than those with a long history of profitability. And the fact is that over the last twelve months Therapeutics lost money at the earnings before interest and tax (EBIT) line. And over the same period it saw negative free cash outflow of US$327m and booked a US$455m accounting loss. While this does make the company a bit risky, it's important to remember it has net cash of US$437.0m. That kitty means the company can keep spending for growth for at least two years, at current rates. Therapeutics's revenue growth shone bright over the last year, so it may well be in a position to turn a profit in due course. Pre-profit companies are often risky, but they can also offer great rewards. 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. Be aware that Therapeutics is showing 2 warning signs in our investment analysis , you should know about...
At the end of the day, it's often better to focus on companies that are free from net debt. You can access our special list of such companies (all with a track record of profit growth). It's free.
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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