Is Delcath Systems (NASDAQ:DCTH) A Risky Investment?

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 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. We can see that Delcath Systems, Inc. (NASDAQ:DCTH) does use debt in its business. But should shareholders be worried about its use of debt?

When Is Debt Dangerous?

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. 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 thing to do when considering how much debt a business uses is to look at 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$4.49m of debt in June 2024, down from US$9.76m, one year before. However, its balance sheet shows it holds US$19.9m in cash, so it actually has US$15.4m net cash.

How Strong Is Delcath Systems' Balance Sheet?

We can see from the most recent balance sheet that Delcath Systems had liabilities of US$12.3m falling due within a year, and liabilities of US$1.62m due beyond that. Offsetting these obligations, it had cash of US$19.9m as well as receivables valued at US$3.75m due within 12 months. So it actually has US$9.74m more liquid assets than total liabilities.

This surplus suggests that Delcath Systems has a conservative balance sheet, and could probably eliminate its debt without much difficulty. Simply put, the fact that Delcath Systems 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 it is future earnings, more than anything, that will determine Delcath Systems's ability to maintain a healthy balance sheet going forward. So if you're focused on the future you can check out this free report showing analyst profit forecasts.

Over 12 months, Delcath Systems reported revenue of US$12m, which is a gain of 350%, although it did not report any earnings before interest and tax. That's virtually the hole-in-one of revenue growth!

So How Risky Is Delcath Systems?

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 Delcath Systems lost money at the earnings before interest and tax (EBIT) line. And over the same period it saw negative free cash outflow of US$32m and booked a US$56m accounting loss. With only US$15.4m on the balance sheet, it would appear that its going to need to raise capital again soon. The good news for shareholders is that Delcath Systems has dazzling revenue growth, so there's a very good chance it can boost its free cash flow in the years to come. High growth pre-profit companies may well be risky, but they can also offer great rewards. 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. These risks can be hard to spot. Every company has them, and we've spotted 2 warning signs for Delcath Systems (of which 1 is potentially serious!) you should know about.

Of course, if you're the type of investor who prefers buying stocks without the burden of debt, then don't hesitate to discover our exclusive list of net cash growth stocks, today.

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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.