Health Check: How Prudently Does Cumberland Pharmaceuticals (NASDAQ:CPIX) Use Debt?

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 can see that Cumberland Pharmaceuticals Inc. (NASDAQ:CPIX) does use debt in its business. But should shareholders be worried about its use of debt?

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. 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.

Check out our latest analysis for Cumberland Pharmaceuticals

What Is Cumberland Pharmaceuticals's Net Debt?

As you can see below, Cumberland Pharmaceuticals had US$14.0m of debt at June 2021, down from US$17.0m a year prior. But on the other hand it also has US$25.7m in cash, leading to a US$11.7m net cash position.

A Look At Cumberland Pharmaceuticals' Liabilities

We can see from the most recent balance sheet that Cumberland Pharmaceuticals had liabilities of US$18.6m falling due within a year, and liabilities of US$22.4m due beyond that. On the other hand, it had cash of US$25.7m and US$9.15m worth of receivables due within a year. So it has liabilities totalling US$6.23m more than its cash and near-term receivables, combined.

Since publicly traded Cumberland Pharmaceuticals shares are worth a total of US$44.9m, it seems unlikely that this level of liabilities would be a major threat. Having said that, it's clear that we should continue to monitor its balance sheet, lest it change for the worse. Despite its noteworthy liabilities, Cumberland Pharmaceuticals boasts net cash, so it's fair to say it does not have a heavy debt load! There's no doubt that we learn most about debt from the balance sheet. 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 wasn't profitable at an EBIT level, but managed to grow its revenue by 14%, to US$39m. That rate of growth is a bit slow for our taste, but it takes all types to make a world.

So How Risky Is Cumberland Pharmaceuticals?

Although Cumberland Pharmaceuticals had an earnings before interest and tax (EBIT) loss over the last twelve months, it generated positive free cash flow of US$4.7m. 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. Until we see some positive EBIT, we're a bit cautious of the stock, not least because of the rather modest revenue growth. When analysing debt levels, the balance sheet is the obvious place to start. But ultimately, every company can contain risks that exist outside of the balance sheet. For instance, we've identified 2 warning signs for Cumberland Pharmaceuticals (1 can't be ignored) you should be aware of.

At the end of the day, it's often better to focus on companies that are free from net debt. You can access our special list of such companies (all with a track record of profit growth). It's free.

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.

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