Is DURECT (NASDAQ:DRRX) Using Debt Sensibly?

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 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. We can see that DURECT Corporation (NASDAQ:DRRX) does use debt in its business. But should shareholders be worried about its use of debt?

When Is Debt Dangerous?

Generally speaking, debt only becomes a real problem when a company can't easily pay it off, either by raising capital or with its own cash flow. In the worst case scenario, a company can go bankrupt if it cannot pay its creditors. While that is not too common, we often do see indebted companies permanently diluting shareholders because lenders force them to raise capital at a distressed price. 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 examine debt levels, we first consider both cash and debt levels, together.

Check out our latest analysis for DURECT

How Much Debt Does DURECT Carry?

As you can see below, DURECT had US$20.4m of debt, at June 2021, which is about the same as the year before. You can click the chart for greater detail. But it also has US$88.4m in cash to offset that, meaning it has US$68.1m net cash.

A Look At DURECT's Liabilities

We can see from the most recent balance sheet that DURECT had liabilities of US$8.22m falling due within a year, and liabilities of US$24.6m due beyond that. Offsetting this, it had US$88.4m in cash and US$816.0k in receivables that were due within 12 months. So it actually has US$56.4m more liquid assets than total liabilities.

This excess liquidity suggests that DURECT is taking a careful approach to debt. Given it has easily adequate short term liquidity, we don't think it will have any issues with its lenders. Simply put, the fact that DURECT has more cash than debt is arguably a good indication that it can manage its debt safely. The balance sheet is clearly the area to focus on when you are analysing debt. But ultimately the future profitability of the business will decide if DURECT can strengthen its balance sheet over time. So if you want to see what the professionals think, you might find this free report on analyst profit forecasts to be interesting.

In the last year DURECT had a loss before interest and tax, and actually shrunk its revenue by 80%, to US$8.5m. That makes us nervous, to say the least.

So How Risky Is DURECT?

We have no doubt that loss making companies are, in general, riskier than profitable ones. And we do note that DURECT had an earnings before interest and tax (EBIT) loss, over the last year. Indeed, in that time it burnt through US$36m of cash and made a loss of US$37m. With only US$68.1m on the balance sheet, it would appear that its going to need to raise capital again soon. Overall, its balance sheet doesn't seem overly risky, at the moment, but we're always cautious until we see the positive free cash flow. 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. For example - DURECT has 2 warning signs we think you should be aware of.

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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This article by Simply Wall St is general in nature. 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.
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