Warren Buffett famously said, '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. We can see that Liquidia Corporation (NASDAQ:LQDA) does use debt in its business. But the real question is whether this debt is making the company risky.
When Is Debt Dangerous?
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. 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 examine debt levels, we first consider both cash and debt levels, together.
How Much Debt Does Liquidia Carry?
You can click the graphic below for the historical numbers, but it shows that Liquidia had US$11.7m of debt in September 2020, down from US$15.9m, one year before. But on the other hand it also has US$79.6m in cash, leading to a US$67.9m net cash position.
A Look At Liquidia's Liabilities
We can see from the most recent balance sheet that Liquidia had liabilities of US$14.2m falling due within a year, and liabilities of US$11.6m due beyond that. Offsetting these obligations, it had cash of US$79.6m as well as receivables valued at US$945.7k due within 12 months. So it can boast US$54.7m more liquid assets than total liabilities.
This surplus strongly suggests that Liquidia has a rock-solid balance sheet (and the debt is of no concern whatsoever). With this in mind one could posit that its balance sheet means the company is able to handle some adversity. Simply put, the fact that Liquidia 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 Liquidia can strengthen its balance sheet over time. So if you're focused on the future you can check out this free report showing analyst profit forecasts.
It seems likely shareholders hope that Liquidia can significantly advance the business plan before too long, because it doesn't have any significant revenue at the moment.
So How Risky Is Liquidia?
Statistically speaking companies that lose money are riskier than those that make money. And the fact is that over the last twelve months Liquidia lost money at the earnings before interest and tax (EBIT) line. And over the same period it saw negative free cash outflow of US$55m and booked a US$58m accounting loss. Given it only has net cash of US$67.9m, the company may need to raise more capital if it doesn't reach break-even 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. 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. For instance, we've identified 4 warning signs for Liquidia (2 are a bit unpleasant) you should be aware of.
Of course, if you're the type of investor who prefers buying stocks without the burden of debt, then don't hesitate to discover our exclusive list of net cash growth stocks, today.
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What are the risks and opportunities for Liquidia?
Trading at 87.2% below our estimate of its fair value
Revenue is forecast to grow 46.55% per year
Shareholders have been diluted in the past year
Currently unprofitable and not forecast to become profitable over the next 3 years
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. 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.
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