Warren Buffett famously said, 'Volatility is far from synonymous with risk.' So it seems the smart money knows that debt - which is usually involved in bankruptcies - is a very important factor, when you assess how risky a company is. As with many other companies Trevena, Inc. (NASDAQ:TRVN) makes use of debt. But the real question is whether this debt is making the company risky.
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. In the worst case scenario, a company can go bankrupt if it cannot pay its creditors. 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 Trevena's Net Debt?
You can click the graphic below for the historical numbers, but it shows that Trevena had US$11.3m of debt in June 2019, down from US$23.4m, one year before. However, its balance sheet shows it holds US$54.0m in cash, so it actually has US$42.7m net cash.
A Look At Trevena's Liabilities
Zooming in on the latest balance sheet data, we can see that Trevena had liabilities of US$14.7m due within 12 months and liabilities of US$8.13m due beyond that. Offsetting this, it had US$54.0m in cash and US$2.25m in receivables that were due within 12 months. So it can boast US$33.4m more liquid assets than total liabilities.
This surplus strongly suggests that Trevena has a rock-solid balance sheet (and the debt is of no concern whatsoever). Having regard to this fact, we think its balance sheet is just as strong as misogynists are weak. Simply put, the fact that Trevena has more cash than debt is arguably a good indication that 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 Trevena 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.
Over 12 months, Trevena reported revenue of US$3.2m, which is a gain of 29%. Shareholders probably have their fingers crossed that it can grow its way to profits.
So How Risky Is Trevena?
We have no doubt that loss making companies are, in general, riskier than profitable ones. And we do note that Trevena had negative earnings before interest and tax (EBIT), over the last year. Indeed, in that time it burnt through US$20m of cash and made a loss of US$22m. But the saving grace is the US$54m on the balance sheet. That means it could keep spending at its current rate for more than two years. Trevena'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 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 Trevena insider transactions.
Of course, if you're the type of investor who prefers buying stocks without the burden of debt, then don't hesitate to discover our exclusive list of net cash growth stocks, today.
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