Legendary fund manager Li Lu (who Charlie Munger backed) once said, ‘The biggest investment risk is not the volatility of prices, but whether you will suffer a 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. As with many other companies Cerus Corporation (NASDAQ:CERS) makes use of debt. But is this debt a concern to shareholders?
When Is Debt Dangerous?
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. 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 Cerus’s Net Debt?
The chart below, which you can click on for greater detail, shows that Cerus had US$44.5m in debt in June 2020; about the same as the year before. But it also has US$136.5m in cash to offset that, meaning it has US$92.0m net cash.
How Strong Is Cerus’s Balance Sheet?
We can see from the most recent balance sheet that Cerus had liabilities of US$43.1m falling due within a year, and liabilities of US$57.8m due beyond that. Offsetting this, it had US$136.5m in cash and US$20.3m in receivables that were due within 12 months. So it can boast US$55.8m more liquid assets than total liabilities.
This short term liquidity is a sign that Cerus could probably pay off its debt with ease, as its balance sheet is far from stretched. Succinctly put, Cerus 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 Cerus’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, Cerus reported revenue of US$79m, which is a gain of 17%, although it did not report any earnings before interest and tax. That rate of growth is a bit slow for our taste, but it takes all types to make a world.
So How Risky Is Cerus?
We have no doubt that loss making companies are, in general, riskier than profitable ones. And in the last year Cerus had an earnings before interest and tax (EBIT) loss, truth be told. Indeed, in that time it burnt through US$61.7m of cash and made a loss of US$66.2m. But at least it has US$92.0m on the balance sheet to spend on growth, near-term. Overall, its balance sheet doesn’t seem overly risky, at the moment, but we’re always cautious until we see the positive free cash flow. 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. Consider for instance, the ever-present spectre of investment risk. We’ve identified 3 warning signs with Cerus , and understanding them should be part of your investment process.
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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This article by Simply Wall St is general in nature. 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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