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

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.' 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. We can see that Cumberland Pharmaceuticals Inc. (NASDAQ:CPIX) does use debt in its business. But is this debt a concern to shareholders?

When Is Debt A Problem?

Debt assists a business until the business has trouble paying it off, either with new capital or with free cash flow. Ultimately, if the company can't fulfill its legal obligations to repay debt, shareholders could walk away with nothing. 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, plenty of companies use debt to fund growth, without any negative consequences. The first step when considering a company's debt levels is to consider its cash and debt together.

View 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 September 2024 Cumberland Pharmaceuticals had US$16.1m of debt, an increase on US$12.9m, over one year. However, it does have US$17.5m in cash offsetting this, leading to net cash of US$1.37m.

How Strong Is Cumberland Pharmaceuticals' Balance Sheet?

Zooming in on the latest balance sheet data, we can see that Cumberland Pharmaceuticals had liabilities of US$31.1m due within 12 months and liabilities of US$21.2m due beyond that. Offsetting these obligations, it had cash of US$17.5m as well as receivables valued at US$11.3m due within 12 months. So it has liabilities totalling US$23.5m more than its cash and near-term receivables, combined.

This deficit isn't so bad because Cumberland Pharmaceuticals is worth US$86.9m, and thus could probably raise enough capital to shore up its balance sheet, if the need arose. But we definitely want to keep our eyes open to indications that its debt is bringing too much risk. Despite its noteworthy liabilities, Cumberland Pharmaceuticals boasts net cash, so it's fair to say it does not have a heavy debt load! The balance sheet is clearly the area to focus on when you are analysing debt. But it is Cumberland Pharmaceuticals's earnings that will influence how the balance sheet holds up in the future. So when considering debt, it's definitely worth looking at the earnings trend. Click here for an interactive snapshot.

In the last year Cumberland Pharmaceuticals had a loss before interest and tax, and actually shrunk its revenue by 6.5%, to US$37m. That's not what we would hope to see.

So How Risky Is Cumberland Pharmaceuticals?

By their very nature companies that are losing money are more risky than those with a long history of profitability. And in the last year Cumberland Pharmaceuticals had an earnings before interest and tax (EBIT) loss, truth be told. Indeed, in that time it burnt through US$1.7m of cash and made a loss of US$11m. But the saving grace is the US$1.37m on the balance sheet. That means it could keep spending at its current rate for more than two years. Overall, we'd say the stock is a bit risky, and we're usually very cautious until we see positive free cash flow. The balance sheet is clearly the area to focus on when you are analysing debt. But ultimately, every company can contain risks that exist outside of the balance sheet. We've identified 2 warning signs with Cumberland Pharmaceuticals (at least 1 which can't be ignored) , and understanding them should be part of your investment process.

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. 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.