We Think Collegium Pharmaceutical (NASDAQ:COLL) Can Stay On Top Of Its Debt

By
Simply Wall St
Published
October 29, 2021
NasdaqGS:COLL
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Some say volatility, rather than debt, is the best way to think about risk as an investor, but Warren Buffett famously said that 'Volatility is far from synonymous with risk.' 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. Importantly, Collegium Pharmaceutical, Inc. (NASDAQ:COLL) does carry debt. But the real question is whether this debt is making the company risky.

When Is Debt Dangerous?

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. If things get really bad, the lenders can take control of the business. 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, plenty of companies use debt to fund growth, without any negative consequences. When we think about a company's use of debt, we first look at cash and debt together.

See our latest analysis for Collegium Pharmaceutical

What Is Collegium Pharmaceutical's Debt?

The chart below, which you can click on for greater detail, shows that Collegium Pharmaceutical had US$273.4m in debt in June 2021; about the same as the year before. However, it does have US$202.8m in cash offsetting this, leading to net debt of about US$70.6m.

debt-equity-history-analysis
NasdaqGS:COLL Debt to Equity History October 30th 2021

How Strong Is Collegium Pharmaceutical's Balance Sheet?

According to the last reported balance sheet, Collegium Pharmaceutical had liabilities of US$226.8m due within 12 months, and liabilities of US$233.8m due beyond 12 months. Offsetting these obligations, it had cash of US$202.8m as well as receivables valued at US$90.1m due within 12 months. So its liabilities outweigh the sum of its cash and (near-term) receivables by US$167.8m.

While this might seem like a lot, it is not so bad since Collegium Pharmaceutical has a market capitalization of US$716.9m, 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 measure a company's debt load relative to its earnings power by looking at its net debt divided by its earnings before interest, tax, depreciation, and amortization (EBITDA) and by calculating how easily its earnings before interest and tax (EBIT) cover its interest expense (interest cover). Thus we consider debt relative to earnings both with and without depreciation and amortization expenses.

Looking at its net debt to EBITDA of 0.50 and interest cover of 2.7 times, it seems to us that Collegium Pharmaceutical is probably using debt in a pretty reasonable way. So we'd recommend keeping a close eye on the impact financing costs are having on the business. Notably, Collegium Pharmaceutical's EBIT launched higher than Elon Musk, gaining a whopping 462% on last year. 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 Collegium Pharmaceutical'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.

Finally, a company can only pay off debt with cold hard cash, not accounting profits. So we always check how much of that EBIT is translated into free cash flow. Over the last two years, Collegium Pharmaceutical saw substantial negative free cash flow, in total. While investors are no doubt expecting a reversal of that situation in due course, it clearly does mean its use of debt is more risky.

Our View

Based on what we've seen Collegium Pharmaceutical is not finding it easy, given its conversion of EBIT to free cash flow, but the other factors we considered give us cause to be optimistic. There's no doubt that its ability to to grow its EBIT is pretty flash. When we consider all the factors mentioned above, we do feel a bit cautious about Collegium Pharmaceutical's use of debt. While debt does have its upside in higher potential returns, we think shareholders should definitely consider how debt levels might make the stock more risky. When analysing debt levels, the balance sheet is the obvious place to start. However, not all investment risk resides within the balance sheet - far from it. For example, we've discovered 4 warning signs for Collegium Pharmaceutical (2 are potentially serious!) that you should be aware of before investing here.

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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