Is ChemoCentryx (NASDAQ:CCXI) Using Debt In A Risky Way?

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.' 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. As with many other companies ChemoCentryx, Inc. (NASDAQ:CCXI) makes use of debt. 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. Ultimately, if the company can't fulfill its legal obligations to repay debt, shareholders could walk away with nothing. However, a more frequent (but still costly) occurrence is where a company must issue shares at bargain-basement prices, permanently diluting shareholders, just to shore up its balance sheet. Having said that, the most common situation is where a company manages its debt reasonably well - and to its own advantage. The first thing to do when considering how much debt a business uses is to look at its cash and debt together.

View our latest analysis for ChemoCentryx

How Much Debt Does ChemoCentryx Carry?

As you can see below, ChemoCentryx had US$24.6m of debt, at June 2021, which is about the same as the year before. You can click the chart for greater detail. However, its balance sheet shows it holds US$312.6m in cash, so it actually has US$288.1m net cash.

A Look At ChemoCentryx's Liabilities

Zooming in on the latest balance sheet data, we can see that ChemoCentryx had liabilities of US$55.4m due within 12 months and liabilities of US$82.0m due beyond that. Offsetting these obligations, it had cash of US$312.6m as well as receivables valued at US$171.0k due within 12 months. So it actually has US$175.4m 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. Simply put, the fact that ChemoCentryx 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 ChemoCentryx's ability to maintain a healthy balance sheet going forward. 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, ChemoCentryx made a loss at the EBIT level, and saw its revenue drop to US$22m, which is a fall of 72%. To be frank that doesn't bode well.

So How Risky Is ChemoCentryx?

Statistically speaking companies that lose money are riskier than those that make money. And we do note that ChemoCentryx 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$102m and booked a US$123m accounting loss. But at least it has US$288.1m on the balance sheet to spend on growth, near-term. Overall, its balance sheet doesn't seem overly risky, at the moment, but we're always cautious until we see the positive free cash flow. The balance sheet is clearly the area to focus on when you are analysing debt. But ultimately, every company can contain risks that exist outside of the balance sheet. To that end, you should be aware of the 2 warning signs we've spotted with ChemoCentryx .

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.

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.

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