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 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. We note that Coherus BioSciences, Inc. (NASDAQ:CHRS) does have debt on its balance sheet. But is this debt a concern to shareholders?
Why Does Debt Bring Risk?
Debt is a tool to help businesses grow, but if a business is incapable of paying off its lenders, then it exists at their mercy. Part and parcel of capitalism is the process of ‘creative destruction’ where failed businesses are mercilessly liquidated by their bankers. 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, debt can be an important tool in businesses, particularly capital heavy businesses. When we think about a company’s use of debt, we first look at cash and debt together.
How Much Debt Does Coherus BioSciences Carry?
As you can see below, at the end of June 2019, Coherus BioSciences had US$168.5m of debt, up from US$102.3m a year ago. Click the image for more detail. However, it also had US$111.9m in cash, and so its net debt is US$56.6m.
How Strong Is Coherus BioSciences’s Balance Sheet?
Zooming in on the latest balance sheet data, we can see that Coherus BioSciences had liabilities of US$41.4m due within 12 months and liabilities of US$203.0m due beyond that. On the other hand, it had cash of US$111.9m and US$77.4m worth of receivables due within a year. So its liabilities outweigh the sum of its cash and (near-term) receivables by US$55.1m.
Of course, Coherus BioSciences has a market capitalization of US$1.39b, so these liabilities are probably manageable. Having said that, it’s clear that we should continue to monitor its balance sheet, lest it change for the worse. When analysing debt levels, the balance sheet is the obvious place to start. But it is future earnings, more than anything, that will determine Coherus BioSciences’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.
In the last year Coherus BioSciences managed to produce its first revenue as a listed company, but given the lack of profit, shareholders will no doubt be hoping to see some strong increases.
Over the last twelve months Coherus BioSciences produced an earnings before interest and tax (EBIT) loss. To be specific the EBIT loss came in at US$103m. When we look at that and recall the liabilities on its balance sheet, relative to cash, it seems unwise to us for the company to have any debt. So we think its balance sheet is a little strained, though not beyond repair. However, it doesn’t help that it burned through US$184m of cash over the last year. So in short it’s a really risky stock. When I consider a company to be a bit risky, I think it is responsible to check out whether insiders have been reporting any share sales. Luckily, you can click here ito see our graphic depicting Coherus BioSciences insider transactions.
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.
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