Rock star Growth Puts ProPhase Labs (NASDAQ:PRPH) In A Position To Use Debt

Some say volatility, rather than debt, is the best way to think about risk as an investor, but Warren Buffett famously said that 'Volatility is far from synonymous with risk.' 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. As with many other companies ProPhase Labs, Inc. (NASDAQ:PRPH) makes use of debt. But the more important question is: how much risk is that debt creating?

What Risk Does Debt Bring?

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. Part and parcel of capitalism is the process of 'creative destruction' where failed businesses are mercilessly liquidated by their bankers. 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. By replacing dilution, though, debt can be an extremely good tool for businesses that need capital to invest in growth at high rates of return. 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 ProPhase Labs

What Is ProPhase Labs's 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. However, its balance sheet shows it holds US$22.9m in cash, so it actually has US$12.8m net cash.

How Healthy Is ProPhase Labs' Balance Sheet?

According to the last reported balance sheet, ProPhase Labs had liabilities of US$9.93m due within 12 months, and liabilities of US$14.4m due beyond 12 months. Offsetting these obligations, it had cash of US$22.9m as well as receivables valued at US$10.7m due within 12 months. So it can boast US$9.18m more liquid assets than total liabilities.

This surplus suggests that ProPhase Labs has a conservative balance sheet, and could probably eliminate its debt without much difficulty. Simply put, the fact that ProPhase Labs 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 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 want to see what the professionals think, you might find this free report on analyst profit forecasts to be interesting.

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 in the last year ProPhase Labs had an earnings before interest and tax (EBIT) loss, truth be told. Indeed, in that time it burnt through US$21m of cash and made a loss of US$5.3m. Given it only has net cash of US$12.8m, the company may need to raise more capital if it doesn't reach break-even 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 4 warning signs in our investment analysis , and 1 of those is a bit concerning...

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.

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.

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