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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.’ So it seems the smart money knows that debt – which is usually involved in bankruptcies – is a very important factor, when you assess how risky a company is. Importantly, Xeris Pharmaceuticals, Inc. (NASDAQ:XERS) does carry debt. But is this debt a concern to shareholders?
When Is Debt A Problem?
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. In the worst case scenario, a company can go bankrupt if it cannot pay its creditors. 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. By replacing dilution, though, debt can be an extremely good tool for businesses that need capital to invest in growth at high rates of return. The first step when considering a company’s debt levels is to consider its cash and debt together.
What Is Xeris Pharmaceuticals’s Net Debt?
You can click the graphic below for the historical numbers, but it shows that as of March 2019 Xeris Pharmaceuticals had US$32.1m of debt, an increase on US$18.1m, over one year. But on the other hand it also has US$147.7m in cash, leading to a US$115.5m net cash position.
A Look At Xeris Pharmaceuticals’s Liabilities
Zooming in on the latest balance sheet data, we can see that Xeris Pharmaceuticals had liabilities of US$13.4m due within 12 months and liabilities of US$40.5m due beyond that. Offsetting this, it had US$147.7m in cash and US$3.63m in receivables that were due within 12 months. So it can boast US$97.4m more liquid assets than total liabilities.
This luscious liquidity implies that Xeris Pharmaceuticals’s balance sheet is sturdy like a giant sequoia tree. With this in mind one could posit that its balance sheet is as strong as beautiful a rare rhino. Xeris Pharmaceuticals boasts net cash, so it’s fair to say it does not have a heavy debt load! There’s no doubt that we learn most about debt from the balance sheet. But ultimately the future profitability of the business will decide if Xeris Pharmaceuticals can strengthen its balance sheet over time. So if you’re focused on the future you can check out this free report showing analyst profit forecasts.
In the last year Xeris Pharmaceuticals managed to grow its revenue by 67%, to US$2.5m. With any luck the company will be able to grow its way to profitability.
So How Risky Is Xeris Pharmaceuticals?
We have no doubt that loss making companies are, in general, riskier than profitable ones. And in the last year Xeris Pharmaceuticals had negative earnings before interest and tax (EBIT), truth be told. And over the same period it saw negative free cash outflow of US$71m and booked a US$73m accounting loss. However, it has net cash of US$148m, so it has a bit of time before it will need more capital. Xeris Pharmaceuticals’s revenue growth shone bright over the last year, so it may well be in a position to turn a profit in due course. Pre-profit companies are often risky, but they can also offer great rewards. For riskier companies like Xeris Pharmaceuticals I always like to keep an eye on whether insiders are buying or selling. So click here if you want to find out for yourself.
When all is said and done, sometimes its easier to focus on companies that don’t even need debt. Readers can access a list of growth stocks with zero net debt 100% free, right now.
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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. Thank you for reading.