Is GW Pharmaceuticals (NASDAQ:GWPH) Using Debt In A Risky Way?

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.’ 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 note that GW Pharmaceuticals plc (NASDAQ:GWPH) does have debt on its balance sheet. But the more important question is: how much risk is that debt creating?

Why Does Debt Bring Risk?

Debt and other liabilities become risky for a business when it cannot easily fulfill those obligations, either with free cash flow or by raising capital at an attractive price. 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, 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 examine debt levels, we first consider both cash and debt levels, together.

View our latest analysis for GW Pharmaceuticals

What Is GW Pharmaceuticals’s Debt?

The image below, which you can click on for greater detail, shows that GW Pharmaceuticals had debt of US$9.69m at the end of June 2019, a reduction from US$17.0m over a year. But it also has US$583.7m in cash to offset that, meaning it has US$574.0m net cash.

NasdaqGM:GWPH Historical Debt, August 20th 2019
NasdaqGM:GWPH Historical Debt, August 20th 2019

A Look At GW Pharmaceuticals’s Liabilities

According to the last reported balance sheet, GW Pharmaceuticals had liabilities of US$83.9m due within 12 months, and liabilities of US$29.9m due beyond 12 months. Offsetting this, it had US$583.7m in cash and US$32.1m in receivables that were due within 12 months. So it actually has US$501.9m more liquid assets than total liabilities.

This surplus suggests that GW Pharmaceuticals has a conservative balance sheet, and could probably eliminate its debt without much difficulty. Succinctly put, GW Pharmaceuticals boasts net cash, so it’s fair to say it does not have a heavy debt load! 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 GW Pharmaceuticals 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, GW Pharmaceuticals reported revenue of US$132m, which is a gain of 674%. When it comes to revenue growth, that’s like nailing the game winning 3-pointer!

So How Risky Is GW Pharmaceuticals?

By their very nature companies that are losing money are more risky than those with a long history of profitability. And the fact is that over the last twelve months GW Pharmaceuticals lost money at the earnings before interest and tax (EBIT) line. And over the same period it saw negative free cash outflow of US$372m and booked a US$104m accounting loss. But at least it has US$584m on the balance sheet to spend on growth, near-term. Importantly, GW Pharmaceuticals’s revenue growth is hot to trot. High growth pre-profit companies may well be risky, but they can also offer great rewards. For riskier companies like GW Pharmaceuticals I always like to keep an eye on the long term profit and revenue trends. Fortunately, you can click to see our interactive graph of its profit, revenue, and operating cashflow.

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.

We aim to bring you long-term focused research analysis driven by fundamental data. Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative material.

If you spot an error that warrants correction, please contact the editor at editorial-team@simplywallst.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. Thank you for reading.