Does KemPharm (NASDAQ:KMPH) Have A Healthy Balance Sheet?

The external fund manager backed by Berkshire Hathaway's Charlie Munger, Li Lu, makes no bones about it when he says 'The biggest investment risk is not the volatility of prices, but whether you will suffer a permanent loss of capital.' When we think about how risky a company is, we always like to look at its use of debt, since debt overload can lead to ruin. We note that KemPharm, Inc. (NASDAQ:KMPH) does have debt on its balance sheet. But the more important question is: how much risk is that debt creating?

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. Part and parcel of capitalism is the process of 'creative destruction' where failed businesses are mercilessly liquidated by their bankers. 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, debt can be an important tool in businesses, particularly capital heavy businesses. When we think about a company's use of debt, we first look at cash and debt together.

View our latest analysis for KemPharm

How Much Debt Does KemPharm Carry?

As you can see below, at the end of June 2022, KemPharm had US$14.6m of debt, up from none a year ago. Click the image for more detail. However, it does have US$81.0m in cash offsetting this, leading to net cash of US$66.4m.

How Strong Is KemPharm's Balance Sheet?

We can see from the most recent balance sheet that KemPharm had liabilities of US$7.16m falling due within a year, and liabilities of US$17.9m due beyond that. On the other hand, it had cash of US$81.0m and US$2.82m worth of receivables due within a year. So it can boast US$58.8m more liquid assets than total liabilities.

This luscious liquidity implies that KemPharm's balance sheet is sturdy like a giant sequoia tree. On this view, lenders should feel as safe as the beloved of a black-belt karate master. Simply put, the fact that KemPharm 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 ultimately the future profitability of the business will decide if KemPharm 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 KemPharm had a loss before interest and tax, and actually shrunk its revenue by 65%, to US$9.8m. To be frank that doesn't bode well.

So How Risky Is KemPharm?

Statistically speaking companies that lose money are riskier than those that make money. And in the last year KemPharm had an earnings before interest and tax (EBIT) loss, truth be told. And over the same period it saw negative free cash outflow of US$11m and booked a US$30m accounting loss. With only US$66.4m on the balance sheet, it would appear that its going to need to raise capital again soon. Even though its balance sheet seems sufficiently liquid, debt always makes us a little nervous if a company doesn't produce free cash flow regularly. 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 KemPharm 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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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.