Is Liquidia (NASDAQ:LQDA) A Risky Investment?

Legendary fund manager Li Lu (who Charlie Munger backed) once said, '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. Importantly, Liquidia Corporation (NASDAQ:LQDA) does carry debt. But should shareholders be worried about its use of debt?

When Is Debt A Problem?

Debt is a tool to help businesses grow, but if a business is incapable of paying off its lenders, then it exists at their mercy. 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. Of course, debt can be an important tool in businesses, particularly capital heavy businesses. When we examine debt levels, we first consider both cash and debt levels, together.

View our latest analysis for Liquidia

What Is Liquidia's Debt?

You can click the graphic below for the historical numbers, but it shows that as of March 2024 Liquidia had US$84.4m of debt, an increase on US$32.6m, over one year. However, its balance sheet shows it holds US$157.9m in cash, so it actually has US$73.5m net cash.

How Strong Is Liquidia's Balance Sheet?

Zooming in on the latest balance sheet data, we can see that Liquidia had liabilities of US$21.9m due within 12 months and liabilities of US$88.9m due beyond that. On the other hand, it had cash of US$157.9m and US$2.57m worth of receivables due within a year. So it can boast US$49.6m more liquid assets than total liabilities.

This surplus suggests that Liquidia has a conservative balance sheet, and could probably eliminate its debt without much difficulty. Succinctly put, Liquidia boasts net cash, so it's fair to say it does not have a heavy debt load! 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.

In the last year Liquidia had a loss before interest and tax, and actually shrunk its revenue by 5.7%, to US$16m. That's not what we would hope to see.

So How Risky Is Liquidia?

We have no doubt that loss making companies are, in general, riskier than profitable ones. And in the last year Liquidia 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$70m and booked a US$108m accounting loss. However, it has net cash of US$73.5m, 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. The balance sheet is clearly the area to focus on when you are analysing debt. But ultimately, every company can contain risks that exist outside of the balance sheet. We've identified 1 warning sign with Liquidia , and understanding them should be part of your investment process.

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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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.

Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team@simplywallst.com