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 note that MannKind Corporation (NASDAQ:MNKD) does have debt on its balance sheet. But should shareholders be worried about its use of debt?
What Risk Does Debt Bring?
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. If things get really bad, the lenders can take control of the business. However, a more common (but still painful) scenario is that it has to raise new equity capital at a low price, thus permanently diluting shareholders. Of course, debt can be an important tool in businesses, particularly capital heavy businesses. When we think about a company’s use of debt, we first look at cash and debt together.
What Is MannKind’s Debt?
As you can see below, MannKind had US$102.5m of debt at March 2019, down from US$140.3m a year prior. However, it does have US$59.3m in cash offsetting this, leading to net debt of about US$43.2m.
How Strong Is MannKind’s Balance Sheet?
The latest balance sheet data shows that MannKind had liabilities of US$77.9m due within a year, and liabilities of US$211.1m falling due after that. On the other hand, it had cash of US$59.3m and US$3.76m worth of receivables due within a year. So its liabilities outweigh the sum of its cash and (near-term) receivables by US$225.9m.
Given this deficit is actually higher than the company’s market capitalization of US$212.2m, we think shareholders really should watch MannKind’s debt levels, like a parent watching their child ride a bike for the first time. In the scenario where the company had to clean up its balance sheet quickly, it seems likely shareholders would suffer extensive dilution. There’s no doubt that we learn most about debt from the balance sheet. But ultimately the future profitability of the business will decide if MannKind can strengthen its balance sheet over time. 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, MannKind reported revenue of US$42m, which is a gain of 261%. That’s virtually the hole-in-one of revenue growth!
Even though MannKind managed to grow its top line quite deftly, the cold hard truth is that it is losing money on the EBIT line. Indeed, it lost a very considerable US$71m at the EBIT level. Considering that alongside the liabilities mentioned above make us nervous about the company. We’d want to see some strong near-term improvements before getting too interested in the stock. Not least because it had negative free cash flow of US$28m over the last twelve months. That means it’s on the risky side of things. For riskier companies like MannKind I always like to keep an eye on whether insiders are buying or selling. So click here if you want to find out for yourself.
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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