Health Check: How Prudently Does Therapeutics (NASDAQ:PTCT) Use Debt?

Some say volatility, rather than debt, is the best way to think about risk as an investor, but Warren Buffett famously said that 'Volatility is far from synonymous with risk.' So it might be obvious that you need to consider debt, when you think about how risky any given stock is, because too much debt can sink a company. As with many other companies PTC Therapeutics, Inc. (NASDAQ:PTCT) makes use of debt. But the more important question is: how much risk is that debt creating?

What Risk Does Debt Bring?

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 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. When we examine debt levels, we first consider both cash and debt levels, together.

View our latest analysis for Therapeutics

How Much Debt Does Therapeutics Carry?

The image below, which you can click on for greater detail, shows that at June 2020 Therapeutics had debt of US$315.4m, up from US$155.7m in one year. But on the other hand it also has US$498.9m in cash, leading to a US$183.5m net cash position.

A Look At Therapeutics's Liabilities

We can see from the most recent balance sheet that Therapeutics had liabilities of US$201.8m falling due within a year, and liabilities of US$702.3m due beyond that. Offsetting these obligations, it had cash of US$498.9m as well as receivables valued at US$53.6m due within 12 months. So it has liabilities totalling US$351.6m more than its cash and near-term receivables, combined.

Since publicly traded Therapeutics shares are worth a total of US$3.28b, it seems unlikely that this level of liabilities would be a major threat. However, we do think it is worth keeping an eye on its balance sheet strength, as it may change over time. 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. The balance sheet is clearly the area to focus on when you are analysing debt. But ultimately the future profitability of the business will decide if Therapeutics can strengthen its balance sheet over time. So if you want to see what the professionals think, you might find this free report on analyst profit forecasts to be interesting.

Over 12 months, Therapeutics reported revenue of US$311m, which is a gain of 12%, 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 Therapeutics?

We have no doubt that loss making companies are, in general, riskier than profitable ones. And in the last year Therapeutics had an earnings before interest and tax (EBIT) loss, truth be told. Indeed, in that time it burnt through US$221.3m of cash and made a loss of US$431.8m. But the saving grace is the US$183.5m on the balance sheet. 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. 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. Take risks, for example - Therapeutics has 1 warning sign we think you should be aware of.

If you're interested in investing in businesses that can grow profits without the burden of debt, then check out this free list of growing businesses that have net cash on the balance sheet.

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