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

Howard Marks put it nicely when he said that, rather than worrying about share price volatility, 'The possibility of permanent loss is the risk I worry about... and every practical investor I know worries about.' 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. Importantly, Cumberland Pharmaceuticals Inc. (NASDAQ:CPIX) does carry debt. But the real question is whether this debt is making the company risky.

When Is Debt Dangerous?

Debt is a tool to help businesses grow, but if a business is incapable of paying off its lenders, then it exists at their mercy. Ultimately, if the company can't fulfill its legal obligations to repay debt, shareholders could walk away with nothing. 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. By replacing dilution, though, debt can be an extremely good tool for businesses that need capital to invest in growth at high rates of return. The first step when considering a company's debt levels is to consider its cash and debt together.

See our latest analysis for Cumberland Pharmaceuticals

What Is Cumberland Pharmaceuticals's Net Debt?

The image below, which you can click on for greater detail, shows that at June 2024 Cumberland Pharmaceuticals had debt of US$16.1m, up from US$13.1m in one year. But on the other hand it also has US$17.3m in cash, leading to a US$1.24m net cash position.

How Healthy Is Cumberland Pharmaceuticals' Balance Sheet?

According to the last reported balance sheet, Cumberland Pharmaceuticals had liabilities of US$24.8m due within 12 months, and liabilities of US$27.7m due beyond 12 months. Offsetting these obligations, it had cash of US$17.3m as well as receivables valued at US$11.6m due within 12 months. So its liabilities total US$23.5m more than the combination of its cash and short-term receivables.

Given this deficit is actually higher than the company's market capitalization of US$15.8m, we think shareholders really should watch Cumberland Pharmaceuticals's debt levels, like a parent watching their child ride a bike for the first time. In the scenario where the company had to clean up its balance sheet quickly, it seems likely shareholders would suffer extensive dilution. Cumberland Pharmaceuticals boasts net cash, so it's fair to say it does not have a heavy debt load, even if it does have very significant liabilities, in total. The balance sheet is clearly the area to focus on when you are analysing debt. 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.

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 7.0%. That's not what we would hope to see.

So How Risky Is Cumberland Pharmaceuticals?

Statistically speaking companies that lose money are riskier than those that make money. And in the last year Cumberland Pharmaceuticals had an earnings before interest and tax (EBIT) loss, truth be told. Indeed, in that time it burnt through US$1.0m of cash and made a loss of US$10m. But the saving grace is the US$1.24m on the balance sheet. That kitty means the company can keep spending for growth for at least two years, at current rates. Summing up, we're a little skeptical of this one, as it seems fairly risky in the absence of free cashflow. The balance sheet is clearly the area to focus on when you are analysing debt. But ultimately, every company can contain risks that exist outside of the balance sheet. Case in point: We've spotted 1 warning sign for Cumberland Pharmaceuticals 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.

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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.