Stock Analysis

Collegium Pharmaceutical (NASDAQ:COLL) Has A Somewhat Strained Balance Sheet

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NasdaqGS:COLL
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Howard Marks put it nicely when he said that, rather than worrying about share price volatility, 'The possibility of permanent loss is the risk I worry about... and every practical investor I know worries about.' 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. Importantly, Collegium Pharmaceutical, Inc. (NASDAQ:COLL) does carry debt. But the more important question is: how much risk is that debt creating?

Why Does Debt Bring Risk?

Generally speaking, debt only becomes a real problem when a company can't easily pay it off, either by raising capital or with its own cash flow. If things get really bad, the lenders can take control of the business. 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, plenty of companies use debt to fund growth, without any negative consequences. 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 Collegium Pharmaceutical

What Is Collegium Pharmaceutical's Net Debt?

The image below, which you can click on for greater detail, shows that at September 2020 Collegium Pharmaceutical had debt of US$267.0m, up from US$11.5m in one year. However, it also had US$165.4m in cash, and so its net debt is US$101.6m.

debt-equity-history-analysis
NasdaqGS:COLL Debt to Equity History January 16th 2021

How Healthy Is Collegium Pharmaceutical's Balance Sheet?

The latest balance sheet data shows that Collegium Pharmaceutical had liabilities of US$242.4m due within a year, and liabilities of US$228.7m falling due after that. On the other hand, it had cash of US$165.4m and US$76.5m worth of receivables due within a year. So it has liabilities totalling US$229.3m more than its cash and near-term receivables, combined.

While this might seem like a lot, it is not so bad since Collegium Pharmaceutical has a market capitalization of US$832.1m, and so it could probably strengthen its balance sheet by raising capital if it needed to. But we definitely want to keep our eyes open to indications that its debt is bringing too much risk.

We use two main ratios to inform us about debt levels relative to earnings. The first is net debt divided by earnings before interest, tax, depreciation, and amortization (EBITDA), while the second is how many times its earnings before interest and tax (EBIT) covers its interest expense (or its interest cover, for short). Thus we consider debt relative to earnings both with and without depreciation and amortization expenses.

Collegium Pharmaceutical has a very low debt to EBITDA ratio of 1.2 so it is strange to see weak interest coverage, with last year's EBIT being only 1.9 times the interest expense. So one way or the other, it's clear the debt levels are not trivial. We also note that Collegium Pharmaceutical improved its EBIT from a last year's loss to a positive US$39m. The balance sheet is clearly the area to focus on when you are analysing debt. But ultimately the future profitability of the business will decide if Collegium Pharmaceutical can strengthen its balance sheet over time. So if you want to see what the professionals think, you might find this free report on analyst profit forecasts to be interesting.

Finally, a business needs free cash flow to pay off debt; accounting profits just don't cut it. So it is important to check how much of its earnings before interest and tax (EBIT) converts to actual free cash flow. During the last year, Collegium Pharmaceutical burned a lot of cash. While that may be a result of expenditure for growth, it does make the debt far more risky.

Our View

To be frank both Collegium Pharmaceutical's interest cover and its track record of converting EBIT to free cash flow make us rather uncomfortable with its debt levels. But on the bright side, its net debt to EBITDA is a good sign, and makes us more optimistic. Looking at the balance sheet and taking into account all these factors, we do believe that debt is making Collegium Pharmaceutical stock a bit risky. Some people like that sort of risk, but we're mindful of the potential pitfalls, so we'd probably prefer it carry less debt. 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 instance, we've identified 3 warning signs for Collegium Pharmaceutical (1 makes us a bit uncomfortable) you should be aware of.

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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What are the risks and opportunities for Collegium Pharmaceutical?

Collegium Pharmaceutical, Inc., a specialty pharmaceutical company, develops and commercializes medicines for pain management.

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Rewards

  • Trading at 78.3% below our estimate of its fair value

  • Earnings are forecast to grow 46.24% per year

Risks

No risks detected for COLL from our risks checks.

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