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 note that CASI Pharmaceuticals, Inc. (NASDAQ:CASI) does have debt on its balance sheet. But should shareholders be worried about its use of debt?
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. The first thing to do when considering how much debt a business uses is to look at its cash and debt together.
How Much Debt Does CASI Pharmaceuticals Carry?
The image below, which you can click on for greater detail, shows that at March 2021 CASI Pharmaceuticals had debt of US$1.99m, up from none in one year. However, its balance sheet shows it holds US$79.1m in cash, so it actually has US$77.1m net cash.
A Look At CASI Pharmaceuticals' Liabilities
Zooming in on the latest balance sheet data, we can see that CASI Pharmaceuticals had liabilities of US$9.97m due within 12 months and liabilities of US$15.9m due beyond that. Offsetting this, it had US$79.1m in cash and US$5.84m in receivables that were due within 12 months. So it can boast US$59.0m more liquid assets than total liabilities.
This surplus suggests that CASI Pharmaceuticals is using debt in a way that is appears to be both safe and conservative. Because it has plenty of assets, it is unlikely to have trouble with its lenders. Simply put, the fact that CASI Pharmaceuticals has more cash than debt is arguably a good indication that it can manage its debt safely. There's no doubt that we learn most about debt from the balance sheet. But it is future earnings, more than anything, that will determine CASI Pharmaceuticals'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, CASI Pharmaceuticals reported revenue of US$17m, which is a gain of 132%, although it did not report any earnings before interest and tax. So there's no doubt that shareholders are cheering for growth
So How Risky Is CASI Pharmaceuticals?
Statistically speaking companies that lose money are riskier than those that make money. And we do note that CASI Pharmaceuticals had an earnings before interest and tax (EBIT) loss, over the last year. And over the same period it saw negative free cash outflow of US$53m and booked a US$54m accounting loss. But at least it has US$77.1m on the balance sheet to spend on growth, near-term. The good news for shareholders is that CASI Pharmaceuticals 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. For example, we've discovered 3 warning signs for CASI Pharmaceuticals that you should be aware of before investing here.
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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