Is Liquidia (NASDAQ:LQDA) Using Debt In A Risky Way?

Warren Buffett famously said, 'Volatility is far from synonymous with risk.' 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 Liquidia Corporation (NASDAQ:LQDA) makes use of debt. But is this debt a concern to shareholders?

What Risk Does Debt Bring?

Debt assists a business until the business has trouble paying it off, either with new capital or with free cash flow. In the worst case scenario, a company can go bankrupt if it cannot pay its creditors. 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.

See our latest analysis for Liquidia

What Is Liquidia's Net Debt?

The image below, which you can click on for greater detail, shows that Liquidia had debt of US$10.3m at the end of September 2021, a reduction from US$11.7m over a year. However, it does have US$64.1m in cash offsetting this, leading to net cash of US$53.7m.

How Strong Is Liquidia's Balance Sheet?

Zooming in on the latest balance sheet data, we can see that Liquidia had liabilities of US$7.06m due within 12 months and liabilities of US$20.3m due beyond that. Offsetting this, it had US$64.1m in cash and US$3.05m in receivables that were due within 12 months. So it actually has US$39.8m more liquid assets than total liabilities.

This short term liquidity is a sign that Liquidia could probably pay off its debt with ease, as its balance sheet is far from stretched. Succinctly put, Liquidia boasts net cash, so it's fair to say it does not have a heavy debt load! The balance sheet is clearly the area to focus on when you are analysing debt. But it is future earnings, more than anything, that will determine Liquidia's ability to maintain a healthy balance sheet going forward. So if you're focused on the future you can check out this free report showing analyst profit forecasts.

In the last year Liquidia managed to produce its first revenue as a listed company, but given the lack of profit, shareholders will no doubt be hoping to see some strong increases.

So How Risky Is Liquidia?

Statistically speaking companies that lose money are riskier than those that make money. And we do note that Liquidia had an earnings before interest and tax (EBIT) loss, over the last year. Indeed, in that time it burnt through US$41m of cash and made a loss of US$39m. With only US$53.7m 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. There's no doubt that we learn most about debt from the balance sheet. However, not all investment risk resides within the balance sheet - far from it. To that end, you should be aware of the 2 warning signs we've spotted with Liquidia .

If you're interested in investing in businesses that can grow profits without the burden of debt, then check out this free list of growing businesses that have net cash on the balance sheet.

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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.