Does Cumberland Pharmaceuticals (NASDAQ:CPIX) Have A Healthy Balance Sheet?

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.' When we think about how risky a company is, we always like to look at its use of debt, since debt overload can lead to ruin. As with many other companies Cumberland Pharmaceuticals Inc. (NASDAQ:CPIX) makes use of debt. But is this debt a concern to shareholders?

What Risk Does Debt Bring?

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. In the worst case scenario, a company can go bankrupt if it cannot pay its creditors. 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. 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.

See our latest analysis for Cumberland Pharmaceuticals

What Is Cumberland Pharmaceuticals's Debt?

You can click the graphic below for the historical numbers, but it shows that as of December 2022 Cumberland Pharmaceuticals had US$16.2m of debt, an increase on US$15.0m, over one year. But on the other hand it also has US$19.8m in cash, leading to a US$3.56m net cash position.

A Look At Cumberland Pharmaceuticals' Liabilities

The latest balance sheet data shows that Cumberland Pharmaceuticals had liabilities of US$28.6m due within a year, and liabilities of US$28.4m falling due after that. On the other hand, it had cash of US$19.8m and US$13.2m worth of receivables due within a year. So its liabilities total US$24.0m more than the combination of its cash and short-term receivables.

This is a mountain of leverage relative to its market capitalization of US$27.6m. This suggests shareholders would be heavily diluted if the company needed to shore up its balance sheet in a hurry. While it does have liabilities worth noting, Cumberland Pharmaceuticals also has more cash than debt, so we're pretty confident it can manage its debt safely. There's no doubt that we learn most about debt from the balance sheet. But you can't view debt in total isolation; since Cumberland Pharmaceuticals will need earnings to service that debt. So when considering debt, it's definitely worth looking at the earnings trend. Click here for an interactive snapshot.

Over 12 months, Cumberland Pharmaceuticals reported revenue of US$42m, which is a gain of 17%, although it did not report any earnings before interest and tax. We usually like to see faster growth from unprofitable companies, but each to their own.

So How Risky Is Cumberland Pharmaceuticals?

While Cumberland Pharmaceuticals lost money on an earnings before interest and tax (EBIT) level, it actually generated positive free cash flow US$6.4m. So taking that on face value, and considering the net cash situation, we don't think that the stock is too risky in the near term. With revenue growth uninspiring, we'd really need to see some positive EBIT before mustering much enthusiasm for this business. 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 - Cumberland Pharmaceuticals has 1 warning sign we think you should be aware of.

If, after all that, you're more interested in a fast growing company with a rock-solid balance sheet, then check out our list of net cash growth stocks without delay.

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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.