Howard Marks put it nicely when he said that, rather than worrying about share price volatility, ‘The possibility of permanent loss is the risk I worry about… and every practical investor I know worries about. 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. We note that ChemoCentryx, Inc. (NASDAQ:CCXI) does have debt on its balance sheet. But is this debt a concern to shareholders?
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. Part and parcel of capitalism is the process of ‘creative destruction’ where failed businesses are mercilessly liquidated by their bankers. While that is not too common, we often do see indebted companies permanently diluting shareholders because lenders force them to raise capital at a distressed price. Of course, debt can be an important tool in businesses, particularly capital heavy businesses. The first step when considering a company’s debt levels is to consider its cash and debt together.
What Is ChemoCentryx’s Net Debt?
The image below, which you can click on for greater detail, shows that at September 2019 ChemoCentryx had debt of US$19.8m, up from US$14.7 in one year. But on the other hand it also has US$170.9m in cash, leading to a US$151.2m net cash position.
How Healthy Is ChemoCentryx’s Balance Sheet?
Zooming in on the latest balance sheet data, we can see that ChemoCentryx had liabilities of US$55.4m due within 12 months and liabilities of US$95.1m due beyond that. Offsetting this, it had US$170.9m in cash and US$167.0k in receivables that were due within 12 months. So it actually has US$20.6m more liquid assets than total liabilities.
This state of affairs indicates that ChemoCentryx’s balance sheet looks quite solid, as its total liabilities are just about equal to its liquid assets. So it’s very unlikely that the US$2.54b company is short on cash, but still worth keeping an eye on the balance sheet. Simply put, the fact that ChemoCentryx has more cash than debt is arguably a good indication that it can manage its debt safely. When analysing debt levels, the balance sheet is the obvious place to start. But ultimately the future profitability of the business will decide if ChemoCentryx 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.
In the last year ChemoCentryx had negative earnings before interest and tax, and actually shrunk its revenue by 61%, to US$35m. That makes us nervous, to say the least.
So How Risky Is ChemoCentryx?
Statistically speaking companies that lose money are riskier than those that make money. And in the last year ChemoCentryx had negative earnings before interest and tax (EBIT), truth be told. And over the same period it saw negative free cash outflow of US$66m and booked a US$51m accounting loss. But at least it has US$151.2m 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. 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 be aware of the 3 warning signs we’ve spotted with ChemoCentryx .
If, after all that, you’re more interested in a fast growing company with a rock-solid balance sheet, then check out our list of net cash growth stocks without delay.
If you spot an error that warrants correction, please contact the editor at email@example.com. 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. Simply Wall St has no position in the stocks mentioned.
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