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.' 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. We can see that Kala Pharmaceuticals, Inc. (NASDAQ:KALA) does use debt in its business. But should shareholders be worried about its use of debt?
Why Does Debt Bring Risk?
Debt assists a business until the business has trouble paying it off, either with new capital or with free cash flow. Ultimately, if the company can't fulfill its legal obligations to repay debt, shareholders could walk away with nothing. 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. Having said that, the most common situation is where a company manages its debt reasonably well - and to its own advantage. When we think about a company's use of debt, we first look at cash and debt together.
How Much Debt Does Kala Pharmaceuticals Carry?
The chart below, which you can click on for greater detail, shows that Kala Pharmaceuticals had US$72.2m in debt in December 2020; about the same as the year before. However, its balance sheet shows it holds US$154.1m in cash, so it actually has US$81.9m net cash.
How Healthy Is Kala Pharmaceuticals' Balance Sheet?
The latest balance sheet data shows that Kala Pharmaceuticals had liabilities of US$22.2m due within a year, and liabilities of US$99.4m falling due after that. On the other hand, it had cash of US$154.1m and US$9.85m worth of receivables due within a year. So it can boast US$42.4m more liquid assets than total liabilities.
This short term liquidity is a sign that Kala Pharmaceuticals could probably pay off its debt with ease, as its balance sheet is far from stretched. Simply put, the fact that Kala Pharmaceuticals has more cash than debt is arguably a good indication that it can manage its debt safely. When analysing debt levels, the balance sheet is the obvious place to start. But it is future earnings, more than anything, that will determine Kala Pharmaceuticals's ability to maintain a healthy balance sheet going forward. So if you're focused on the future you can check out this free report showing analyst profit forecasts.
In the last year Kala Pharmaceuticals wasn't profitable at an EBIT level, but managed to grow its revenue by 4.8%, to US$6.4m. We usually like to see faster growth from unprofitable companies, but each to their own.
So How Risky Is Kala Pharmaceuticals?
Statistically speaking companies that lose money are riskier than those that make money. And the fact is that over the last twelve months Kala Pharmaceuticals lost money at the earnings before interest and tax (EBIT) line. Indeed, in that time it burnt through US$93m of cash and made a loss of US$104m. However, it has net cash of US$81.9m, so it has a bit of time before it will need more capital. 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. There's no doubt that we learn most about debt from the balance sheet. But ultimately, every company can contain risks that exist outside of the balance sheet. Case in point: We've spotted 2 warning signs for Kala 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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