ProPhase Labs (NASDAQ:PRPH) Is Using Debt Safely

The external fund manager backed by Berkshire Hathaway's Charlie Munger, Li Lu, makes no bones about it when he says '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. We note that ProPhase Labs, Inc. (NASDAQ:PRPH) does have debt on its balance sheet. But the real question is whether this debt is making the company risky.

Why Does Debt Bring Risk?

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. Ultimately, if the company can't fulfill its legal obligations to repay debt, shareholders could walk away with nothing. 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.

View our latest analysis for ProPhase Labs

What Is ProPhase Labs's Net Debt?

The chart below, which you can click on for greater detail, shows that ProPhase Labs had US$10.1m in debt in September 2021; about the same as the year before. But it also has US$22.9m in cash to offset that, meaning it has US$12.8m net cash.

How Strong Is ProPhase Labs' Balance Sheet?

We can see from the most recent balance sheet that ProPhase Labs had liabilities of US$9.93m falling due within a year, and liabilities of US$14.4m due beyond that. Offsetting this, it had US$22.9m in cash and US$10.7m in receivables that were due within 12 months. So it can boast US$9.18m more liquid assets than total liabilities.

This short term liquidity is a sign that ProPhase Labs could probably pay off its debt with ease, as its balance sheet is far from stretched. Succinctly put, ProPhase Labs boasts net cash, so it's fair to say it does not have a heavy debt load! There's no doubt that we learn most about debt from the balance sheet. But it is future earnings, more than anything, that will determine ProPhase Labs'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 ProPhase Labs wasn't profitable at an EBIT level, but managed to grow its revenue by 213%, to US$39m. That's virtually the hole-in-one of revenue growth!

So How Risky Is ProPhase Labs?

Statistically speaking companies that lose money are riskier than those that make money. And we do note that ProPhase Labs had an earnings before interest and tax (EBIT) loss, over the last year. Indeed, in that time it burnt through US$21m of cash and made a loss of US$5.3m. With only US$12.8m on the balance sheet, it would appear that its going to need to raise capital again soon. The good news for shareholders is that ProPhase Labs has dazzling revenue growth, so there's a very good chance it can boost its free cash flow in the years to come. High growth pre-profit companies may well be risky, but they can also offer great rewards. 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. Be aware that ProPhase Labs is showing 3 warning signs in our investment analysis , and 1 of those is potentially serious...

When all is said and done, sometimes its easier to focus on companies that don't even need debt. Readers can access a list of growth stocks with zero net debt 100% free, right now.

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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.