Does Lipocine (NASDAQ:LPCN) Have A Healthy Balance Sheet?

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.' 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. As with many other companies Lipocine Inc. (NASDAQ:LPCN) makes use of debt. But is this debt a concern to shareholders?

Why Does Debt Bring Risk?

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. If things get really bad, the lenders can take control of the business. 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, 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.

See our latest analysis for Lipocine

What Is Lipocine's Debt?

The image below, which you can click on for greater detail, shows that Lipocine had debt of US$3.14m at the end of September 2021, a reduction from US$6.36m over a year. However, it does have US$38.7m in cash offsetting this, leading to net cash of US$35.5m.

How Healthy Is Lipocine's Balance Sheet?

We can see from the most recent balance sheet that Lipocine had liabilities of US$6.43m falling due within a year, and liabilities of US$1.15m due beyond that. On the other hand, it had cash of US$38.7m and US$159.2k worth of receivables due within a year. So it can boast US$31.2m more liquid assets than total liabilities.

It's good to see that Lipocine has plenty of liquidity on its balance sheet, suggesting conservative management of liabilities. 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 Lipocine 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 Lipocine 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.

Given it has no significant operating revenue at the moment, shareholders will be hoping Lipocine can make progress and gain better traction for the business, before it runs low on cash.

So How Risky Is Lipocine?

Statistically speaking companies that lose money are riskier than those that make money. And we do note that Lipocine had an earnings before interest and tax (EBIT) loss, over the last year. And over the same period it saw negative free cash outflow of US$17m and booked a US$18m accounting loss. But at least it has US$35.5m on the balance sheet to spend on growth, near-term. 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. The balance sheet is clearly the area to focus on when you are analysing debt. However, not all investment risk resides within the balance sheet - far from it. For example, we've discovered 4 warning signs for Lipocine (1 shouldn't be ignored!) that you should be aware of before investing here.

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.