ChemoCentryx (NASDAQ:CCXI) May Not Be Profitable But It Seems To Be Managing Its Debt Just Fine, Anyway

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. We note that ChemoCentryx, Inc. (NASDAQ:CCXI) does have debt on its balance sheet. 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 thing to do when considering how much debt a business uses is to look at its cash and debt together.

See our latest analysis for ChemoCentryx

What Is ChemoCentryx's Debt?

You can click the graphic below for the historical numbers, but it shows that as of September 2020 ChemoCentryx had US$24.3m of debt, an increase on US$19.8m, over one year. But on the other hand it also has US$471.4m in cash, leading to a US$447.1m net cash position.

A Look At ChemoCentryx's Liabilities

Zooming in on the latest balance sheet data, we can see that ChemoCentryx had liabilities of US$46.9m due within 12 months and liabilities of US$81.4m due beyond that. Offsetting this, it had US$471.4m in cash and US$102.0k in receivables that were due within 12 months. So it actually has US$343.3m more liquid assets than total liabilities.

This surplus suggests that ChemoCentryx has a conservative balance sheet, and could probably eliminate its debt without much difficulty. Succinctly put, ChemoCentryx 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 it is future earnings, more than anything, that will determine ChemoCentryx'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.

In the last year ChemoCentryx wasn't profitable at an EBIT level, but managed to grow its revenue by 99%, to US$71m. With any luck the company will be able to grow its way to profitability.

So How Risky Is ChemoCentryx?

Statistically speaking companies that lose money are riskier than those that make money. And the fact is that over the last twelve months ChemoCentryx lost money at the earnings before interest and tax (EBIT) line. And over the same period it saw negative free cash outflow of US$89m and booked a US$41m accounting loss. However, it has net cash of US$447.1m, so it has a bit of time before it will need more capital. With very solid revenue growth in the last year, ChemoCentryx may be on a path to profitability. Pre-profit companies are often risky, but they can also offer great rewards. 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. Be aware that ChemoCentryx is showing 2 warning signs in our investment analysis , you should know about...

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.

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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. 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.
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