Warren Buffett famously said, 'Volatility is far from synonymous with risk.' 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 Liquidia Corporation (NASDAQ:LQDA) does use debt in its business. But the more important question is: how much risk is that debt creating?
When Is Debt Dangerous?
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. 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, the upside of debt is that it often represents cheap capital, especially when it replaces dilution in a company with the ability to reinvest at high rates of return. When we think about a company's use of debt, we first look at cash and debt together.
What Is Liquidia's Net Debt?
You can click the graphic below for the historical numbers, but it shows that as of June 2022 Liquidia had US$19.6m of debt, an increase on US$10.3m, over one year. However, it does have US$103.8m in cash offsetting this, leading to net cash of US$84.2m.
How Strong Is Liquidia's Balance Sheet?
Zooming in on the latest balance sheet data, we can see that Liquidia had liabilities of US$6.84m due within 12 months and liabilities of US$30.1m due beyond that. Offsetting these obligations, it had cash of US$103.8m as well as receivables valued at US$3.75m due within 12 months. So it can boast US$70.6m more liquid assets than total liabilities.
This excess liquidity suggests that Liquidia is taking a careful approach to debt. Given it has easily adequate short term liquidity, we don't think it will have any issues with its lenders. Succinctly put, Liquidia boasts net cash, so it's fair to say it does not have a heavy debt load! When analysing debt levels, the balance sheet is the obvious place to start. But it is future earnings, more than anything, that will determine Liquidia'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.
In the last year Liquidia wasn't profitable at an EBIT level, but managed to grow its revenue by 92%, to US$14m. With any luck the company will be able to grow its way to profitability.
So How Risky Is Liquidia?
We have no doubt that loss making companies are, in general, riskier than profitable ones. And we do note that Liquidia had an earnings before interest and tax (EBIT) loss, over the last year. And over the same period it saw negative free cash outflow of US$32m and booked a US$44m accounting loss. Given it only has net cash of US$84.2m, the company may need to raise more capital if it doesn't reach break-even soon. With very solid revenue growth in the last year, Liquidia may be on a path to profitability. Pre-profit companies are often risky, but they can also offer great rewards. The balance sheet is clearly the area to focus on when you are analysing debt. However, not all investment risk resides within the balance sheet - far from it. To that end, you should learn about the 3 warning signs we've spotted with Liquidia (including 1 which can't be ignored) .
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.
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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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