Stock Analysis

Delcath Systems (NASDAQ:DCTH) Has Debt But No Earnings; Should You Worry?

NasdaqCM:DCTH
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The external fund manager backed by Berkshire Hathaway's Charlie Munger, Li Lu, makes no bones about it when he says '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 Delcath Systems, Inc. (NASDAQ:DCTH) makes use of debt. But is this debt a concern to shareholders?

What Risk Does Debt Bring?

Debt is a tool to help businesses grow, but if a business is incapable of paying off its lenders, then it exists at their mercy. If things get really bad, the lenders can take control of the business. 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, plenty of companies use debt to fund growth, without any negative consequences. The first step when considering a company's debt levels is to consider its cash and debt together.

Check out our latest analysis for Delcath Systems

How Much Debt Does Delcath Systems Carry?

You can click the graphic below for the historical numbers, but it shows that Delcath Systems had US$9.76m of debt in June 2023, down from US$16.1m, one year before. But on the other hand it also has US$14.5m in cash, leading to a US$4.78m net cash position.

debt-equity-history-analysis
NasdaqCM:DCTH Debt to Equity History October 4th 2023

A Look At Delcath Systems' Liabilities

According to the last reported balance sheet, Delcath Systems had liabilities of US$11.1m due within 12 months, and liabilities of US$6.40m due beyond 12 months. Offsetting this, it had US$14.5m in cash and US$127.0k in receivables that were due within 12 months. So its liabilities total US$2.85m more than the combination of its cash and short-term receivables.

Given Delcath Systems has a market capitalization of US$57.0m, it's hard to believe these liabilities pose much threat. But there are sufficient liabilities that we would certainly recommend shareholders continue to monitor the balance sheet, going forward. While it does have liabilities worth noting, Delcath Systems also has more cash than debt, so we're pretty confident 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 Delcath Systems 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, Delcath Systems made a loss at the EBIT level, and saw its revenue drop to US$2.6m, which is a fall of 31%. That makes us nervous, to say the least.

So How Risky Is Delcath Systems?

We have no doubt that loss making companies are, in general, riskier than profitable ones. And the fact is that over the last twelve months Delcath Systems lost money at the earnings before interest and tax (EBIT) line. Indeed, in that time it burnt through US$27m of cash and made a loss of US$34m. Given it only has net cash of US$4.78m, the company may need to raise more capital if it doesn't reach break-even soon. Overall, we'd say the stock is a bit risky, and we're usually very cautious until we see 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. For instance, we've identified 5 warning signs for Delcath Systems (3 are potentially serious) 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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This article by Simply Wall St is general in nature. We provide commentary based on historical data and analyst forecasts only using an unbiased methodology and our articles are not intended to be financial advice. 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.