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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. Importantly, Flexion Therapeutics, Inc. (NASDAQ:FLXN) does carry debt. But the real question is whether this debt is making the company risky.
What Risk Does Debt Bring?
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 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. The first thing to do when considering how much debt a business uses is to look at its cash and debt together.
What Is Flexion Therapeutics’s Debt?
As you can see below, Flexion Therapeutics had US$158.2m of debt, at March 2019, which is about the same the year before. You can click the chart for greater detail. But it also has US$218.1m in cash to offset that, meaning it has US$59.9m net cash.
How Healthy Is Flexion Therapeutics’s Balance Sheet?
The latest balance sheet data shows that Flexion Therapeutics had liabilities of US$39.2m due within a year, and liabilities of US$152.8m falling due after that. On the other hand, it had cash of US$218.1m and US$15.6m worth of receivables due within a year. So it can boast US$41.7m more liquid assets than total liabilities.
This surplus suggests that Flexion Therapeutics has a conservative balance sheet, and could probably eliminate its debt without much difficulty. Flexion Therapeutics boasts net cash, so it’s fair to say it does not have a heavy debt load! There’s no doubt that we learn most about debt from the balance sheet. But ultimately the future profitability of the business will decide if Flexion Therapeutics 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 Flexion Therapeutics managed to grow its revenue by 1112%, to US$31m. That’s virtually the hole-in-one of revenue growth!
So How Risky Is Flexion Therapeutics?
We have no doubt that loss making companies are, in general, riskier than profitable ones. And in the last year Flexion Therapeutics had negative earnings before interest and tax (EBIT), truth be told. Indeed, in that time it burnt through US$155m of cash and made a loss of US$170m. But at least it has US$218m on the balance sheet to spend on growth, near-term. Importantly, Flexion Therapeutics’s revenue growth is hot to trot. High growth pre-profit companies may well be risky, but they can also offer great rewards. When I consider a company to be a bit risky, I think it is responsible to check out whether insiders have been reporting any share sales. Luckily, you can click here ito see our graphic depicting Flexion Therapeutics insider transactions.
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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If you spot an error that warrants correction, please contact the editor at email@example.com. 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. Simply Wall St has no position in the stocks mentioned. Thank you for reading.