Is Liquidia (NASDAQ:LQDA) Using Too Much Debt?

Howard Marks put it nicely when he said that, rather than worrying about share price volatility, 'The possibility of permanent loss is the risk I worry about... and every practical investor I know worries about.' 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 note that Liquidia Corporation (NASDAQ:LQDA) does have debt on its balance sheet. But the more important question is: how much risk is that debt creating?

When Is Debt A Problem?

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, 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 Net Debt?

You can click the graphic below for the historical numbers, but it shows that as of September 2022 Liquidia had US$19.7m of debt, an increase on US$10.3m, over one year. But it also has US$98.3m in cash to offset that, meaning it has US$78.6m net cash.

A Look At Liquidia's Liabilities

We can see from the most recent balance sheet that Liquidia had liabilities of US$7.46m falling due within a year, and liabilities of US$30.1m due beyond that. On the other hand, it had cash of US$98.3m and US$3.14m worth of receivables due within a year. So it can boast US$63.9m 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. 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.

In the last year Liquidia wasn't profitable at an EBIT level, but managed to grow its revenue by 33%, to US$14m. Shareholders probably have their fingers crossed that it can grow its way to profits.

So How Risky Is Liquidia?

We have no doubt that loss making companies are, in general, riskier than profitable ones. 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$32m and booked a US$46m accounting loss. With only US$78.6m on the balance sheet, it would appear that its going to need to raise capital again soon. Liquidia's revenue growth shone bright over the last year, so it may well be in a position to turn a profit in due course. Pre-profit companies are often risky, but they can also offer great rewards. When analysing debt levels, the balance sheet is the obvious place to start. However, not all investment risk resides within the balance sheet - far from it. These risks can be hard to spot. Every company has them, and we've spotted 2 warning signs for Liquidia you should know about.

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.