Is Cerecor (NASDAQ:CERC) A Risky Investment?

David Iben put it well when he said, 'Volatility is not a risk we care about. What we care about is avoiding the permanent loss of capital.' So it might be obvious that you need to consider debt, when you think about how risky any given stock is, because too much debt can sink a company. As with many other companies Cerecor Inc. (NASDAQ:CERC) makes use of debt. But is this debt a concern to shareholders?

What Risk Does Debt Bring?

Debt assists a business until the business has trouble paying it off, either with new capital or with free cash flow. Part and parcel of capitalism is the process of 'creative destruction' where failed businesses are mercilessly liquidated by their bankers. However, a more usual (but still expensive) situation is where a company must dilute shareholders at a cheap share price simply to get debt under control. 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. When we think about a company's use of debt, we first look at cash and debt together.

Check out our latest analysis for Cerecor

What Is Cerecor's Debt?

As you can see below, at the end of June 2021, Cerecor had US$17.1m of debt, up from none a year ago. Click the image for more detail. However, it does have US$40.4m in cash offsetting this, leading to net cash of US$23.3m.

How Healthy Is Cerecor's Balance Sheet?

We can see from the most recent balance sheet that Cerecor had liabilities of US$21.7m falling due within a year, and liabilities of US$20.8m due beyond that. Offsetting this, it had US$40.4m in cash and US$5.12m in receivables that were due within 12 months. So it actually has US$3.06m more liquid assets than total liabilities.

This state of affairs indicates that Cerecor's balance sheet looks quite solid, as its total liabilities are just about equal to its liquid assets. So it's very unlikely that the US$289.9m company is short on cash, but still worth keeping an eye on the balance sheet. Simply put, the fact that Cerecor has more cash than debt is arguably a good indication that it can manage its debt safely. The balance sheet is clearly the area to focus on when you are analysing debt. But it is future earnings, more than anything, that will determine Cerecor'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, Cerecor made a loss at the EBIT level, and saw its revenue drop to US$6.4m, which is a fall of 6.4%. That's not what we would hope to see.

So How Risky Is Cerecor?

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 Cerecor lost money at the earnings before interest and tax (EBIT) line. And over the same period it saw negative free cash outflow of US$64m and booked a US$77m accounting loss. Given it only has net cash of US$23.3m, the company may need to raise more capital if it doesn't reach break-even soon. Even though its balance sheet seems sufficiently liquid, debt always makes us a little nervous if a company doesn't produce free cash flow regularly. There's no doubt that we learn most about debt from the balance sheet. But ultimately, every company can contain risks that exist outside of the balance sheet. Be aware that Cerecor is showing 4 warning signs in our investment analysis , and 1 of those is concerning...

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. 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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