Is Cumberland Pharmaceuticals (NASDAQ:CPIX) Using Too Much Debt?

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. As with many other companies Cumberland Pharmaceuticals Inc. (NASDAQ:CPIX) makes use of debt. But the more important question is: how much risk is that debt creating?

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. Ultimately, if the company can't fulfill its legal obligations to repay debt, shareholders could walk away with nothing. 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, the upside of debt is that it often represents cheap capital, especially when it replaces dilution in a company with the ability to reinvest at high rates of return. When we think about a company's use of debt, we first look at cash and debt together.

Check out the opportunities and risks within the US Pharmaceuticals industry.

What Is Cumberland Pharmaceuticals's Debt?

As you can see below, at the end of June 2022, Cumberland Pharmaceuticals had US$19.0m of debt, up from US$14.0m a year ago. Click the image for more detail. However, because it has a cash reserve of US$18.2m, its net debt is less, at about US$783.4k.

A Look At Cumberland Pharmaceuticals' Liabilities

According to the last reported balance sheet, Cumberland Pharmaceuticals had liabilities of US$24.3m due within 12 months, and liabilities of US$29.1m due beyond 12 months. On the other hand, it had cash of US$18.2m and US$13.3m worth of receivables due within a year. So it has liabilities totalling US$21.8m more than its cash and near-term receivables, combined.

This deficit isn't so bad because Cumberland Pharmaceuticals is worth US$37.1m, and thus could probably raise enough capital to shore up its balance sheet, if the need arose. However, it is still worthwhile taking a close look at its ability to pay off debt. When analysing debt levels, the balance sheet is the obvious place to start. 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.

Over 12 months, Cumberland Pharmaceuticals made a loss at the EBIT level, and saw its revenue drop to US$38m, which is a fall of 3.2%. That's not what we would hope to see.

Caveat Emptor

Over the last twelve months Cumberland Pharmaceuticals produced an earnings before interest and tax (EBIT) loss. Indeed, it lost a very considerable US$9.1m at the EBIT level. Considering that alongside the liabilities mentioned above does not give us much confidence that company should be using so much debt. So we think its balance sheet is a little strained, though not beyond repair. For example, we would not want to see a repeat of last year's loss of US$8.6m. So in short it's a really risky stock. 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. Be aware that Cumberland Pharmaceuticals is showing 1 warning sign in our investment analysis , you should know about...

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.

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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.