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

Some say volatility, rather than debt, is the best way to think about risk as an investor, but Warren Buffett famously said that 'Volatility is far from synonymous with risk.' It's only natural to consider a company's balance sheet when you examine how risky it is, since debt is often involved when a business collapses. As with many other companies Cumberland Pharmaceuticals Inc. (NASDAQ:CPIX) makes use of debt. But is this debt a concern to shareholders?

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. If things get really bad, the lenders can take control of the business. 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, 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. The first step when considering a company's debt levels is to consider its 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$12.8m of debt at December 2023, down from US$16.2m a year prior. But on the other hand it also has US$18.3m in cash, leading to a US$5.54m net cash position.

How Strong Is Cumberland Pharmaceuticals' Balance Sheet?

We can see from the most recent balance sheet that Cumberland Pharmaceuticals had liabilities of US$28.0m falling due within a year, and liabilities of US$24.5m due beyond that. Offsetting this, it had US$18.3m in cash and US$9.76m in receivables that were due within 12 months. So its liabilities outweigh the sum of its cash and (near-term) receivables by US$24.4m.

This deficit is considerable relative to its market capitalization of US$28.2m, so it does suggest shareholders should keep an eye on Cumberland Pharmaceuticals' use of debt. This suggests shareholders would be heavily diluted if the company needed to shore up its balance sheet in a hurry. 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 you can't view debt in total isolation; since Cumberland Pharmaceuticals will need earnings to service that debt. 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 5.9%, to US$40m. 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$5.6m. 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. 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. To that end, you should be aware of the 1 warning sign we've spotted with Cumberland Pharmaceuticals .

If, after all that, you're more interested in a fast growing company with a rock-solid balance sheet, then check out our list of net cash growth stocks without delay.

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