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Warren Buffett famously said, ‘Volatility is far from synonymous with risk.’ So it might be obvious that you need to consider debt, when you think about how risky any given stock is, because too much debt can sink a company. We can see that Liquidia Technologies, Inc. (NASDAQ:LQDA) does use debt in its business. But the more important question is: how much risk is that debt creating?
When Is Debt A Problem?
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. Part and parcel of capitalism is the process of ‘creative destruction’ where failed businesses are mercilessly liquidated by their bankers. 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. Of course, plenty of companies use debt to fund growth, without any negative consequences. The first thing to do when considering how much debt a business uses is to look at its cash and debt together.
How Much Debt Does Liquidia Technologies Carry?
The chart below, which you can click on for greater detail, shows that Liquidia Technologies had US$13.1m in debt in March 2019; about the same as the year before. But on the other hand it also has US$60.8m in cash, leading to a US$47.7m net cash position.
How Strong Is Liquidia Technologies’s Balance Sheet?
Zooming in on the latest balance sheet data, we can see that Liquidia Technologies had liabilities of US$11.0m due within 12 months and liabilities of US$25.4m due beyond that. Offsetting this, it had US$60.8m in cash and US$10.5k in receivables that were due within 12 months. So it can boast US$24.4m more liquid assets than total liabilities.
This excess liquidity suggests that Liquidia Technologies is taking a careful approach to debt. Due to its strong net asset position, it is not likely to face issues with its lenders. Liquidia Technologies 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 it is future earnings, more than anything, that will determine Liquidia Technologies’s ability to maintain a healthy balance sheet going forward. So if you want to see what the professionals think, you might find this free report on analyst profit forecasts to be interesting.
Over 12 months, Liquidia Technologies saw its revenue drop to US$1.8m, which is a fall of 73%. That makes us nervous, to say the least.
So How Risky Is Liquidia Technologies?
Statistically speaking companies that lose money are riskier than those that make money. And we do note that Liquidia Technologies had negative earnings before interest and tax (EBIT), over the last year. Indeed, in that time it burnt through US$33m of cash and made a loss of US$39m. However, it has net cash of US$61m, so it has a bit of time before it will need more capital. 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. For riskier companies like Liquidia Technologies I always like to keep an eye on the long term profit and revenue trends. Fortunately, you can click to see our interactive graph of its profit, revenue, and operating cashflow.
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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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.