Warren Buffett famously said, 'Volatility is far from synonymous with risk.' 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. As with many other companies Cumberland Pharmaceuticals Inc. (NASDAQ:CPIX) makes use of debt. But should shareholders be worried about its use of debt?
When Is Debt A Problem?
Debt and other liabilities become risky for a business when it cannot easily fulfill those obligations, either with free cash flow or by raising capital at an attractive price. In the worst case scenario, a company can go bankrupt if it cannot pay its creditors. However, a more common (but still painful) scenario is that it has to raise new equity capital at a low price, thus permanently diluting shareholders. Having said that, the most common situation is where a company manages its debt reasonably well - and to its own advantage. The first step when considering a company's debt levels is to consider its cash and debt together.
What Is Cumberland Pharmaceuticals's Net Debt?
As you can see below, Cumberland Pharmaceuticals had US$15.0m of debt, at December 2021, which is about the same as the year before. You can click the chart for greater detail. But it also has US$27.0m in cash to offset that, meaning it has US$12.0m net cash.
How Strong Is Cumberland Pharmaceuticals' Balance Sheet?
The latest balance sheet data shows that Cumberland Pharmaceuticals had liabilities of US$19.3m due within a year, and liabilities of US$22.6m falling due after that. Offsetting this, it had US$27.0m in cash and US$6.88m in receivables that were due within 12 months. So it has liabilities totalling US$7.94m more than its cash and near-term receivables, combined.
While this might seem like a lot, it is not so bad since Cumberland Pharmaceuticals has a market capitalization of US$39.0m, 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. 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. The balance sheet is clearly the area to focus on when you are analysing debt. But you can't view debt in total isolation; since Cumberland Pharmaceuticals will need earnings to service that debt. So if you're keen to discover more about its earnings, it might be worth checking out this graph of its long term earnings trend.
In the last year Cumberland Pharmaceuticals had a loss before interest and tax, and actually shrunk its revenue by 3.9%, to US$36m. We would much prefer see growth.
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$6.0m. So although it is loss-making, it doesn't seem to have too much near-term balance sheet risk, keeping in mind the net cash. With revenue growth uninspiring, we'd really need to see some positive EBIT before mustering much enthusiasm for this business. The balance sheet is clearly the area to focus on when you are analysing debt. However, not all investment risk resides within the balance sheet - far from it. For example Cumberland Pharmaceuticals has 3 warning signs (and 1 which is significant) we think 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.
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.