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.' 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. As with many other companies Cumberland Pharmaceuticals Inc. (NASDAQ:CPIX) makes use of debt. But should shareholders be worried about its use of debt?
What Risk Does Debt Bring?
Debt assists a business until the business has trouble paying it off, either with new capital or with free cash flow. In the worst case scenario, a company can go bankrupt if it cannot pay its creditors. 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. The first thing to do when considering how much debt a business uses is to look at its cash and debt together.
What Is Cumberland Pharmaceuticals's Debt?
You can click the graphic below for the historical numbers, but it shows that Cumberland Pharmaceuticals had US$17.0m of debt in June 2020, down from US$20.0m, one year before. But it also has US$27.4m in cash to offset that, meaning it has US$10.4m net cash.
A Look At Cumberland Pharmaceuticals's Liabilities
The latest balance sheet data shows that Cumberland Pharmaceuticals had liabilities of US$22.7m due within a year, and liabilities of US$26.4m falling due after that. Offsetting these obligations, it had cash of US$27.4m as well as receivables valued at US$7.92m due within 12 months. So its liabilities outweigh the sum of its cash and (near-term) receivables by US$13.8m.
While this might seem like a lot, it is not so bad since Cumberland Pharmaceuticals has a market capitalization of US$45.5m, and so it could probably strengthen its balance sheet by raising capital if it needed to. But it's clear that we should definitely closely examine whether it can manage its debt without dilution. 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. When analysing debt levels, the balance sheet is the obvious place to start. But it is future earnings, more than anything, that will determine Cumberland Pharmaceuticals's ability to maintain a healthy balance sheet going forward. So if you're focused on the future you can check out this free report showing analyst profit forecasts.
Over 12 months, Cumberland Pharmaceuticals reported revenue of US$47m, which is a gain of 18%, 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$4.0m. 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. There's no doubt that we learn most about debt from the balance sheet. However, not all investment risk resides within the balance sheet - far from it. Be aware that Cumberland Pharmaceuticals is showing 2 warning signs in our investment analysis , you should know about...
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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