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 seems the smart money knows that debt - which is usually involved in bankruptcies - is a very important factor, when you assess how risky a company is. As with many other companies PTC Therapeutics, Inc. (NASDAQ:PTCT) makes use of debt. But is this debt a concern to shareholders?
Why Does Debt Bring Risk?
Debt is a tool to help businesses grow, but if a business is incapable of paying off its lenders, then it exists at their mercy. If things get really bad, the lenders can take control of the business. While that is not too common, we often do see indebted companies permanently diluting shareholders because lenders force them to raise capital at a distressed price. 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.
What Is Therapeutics's Net Debt?
The image below, which you can click on for greater detail, shows that at June 2021 Therapeutics had debt of US$430.5m, up from US$315.4m in one year. However, it does have US$947.1m in cash offsetting this, leading to net cash of US$516.6m.
A Look At Therapeutics' Liabilities
According to the last reported balance sheet, Therapeutics had liabilities of US$291.0m due within 12 months, and liabilities of US$1.57b due beyond 12 months. Offsetting this, it had US$947.1m in cash and US$78.8m in receivables that were due within 12 months. So its liabilities total US$836.2m more than the combination of its cash and short-term receivables.
Therapeutics has a market capitalization of US$2.62b, so it could very likely raise cash to ameliorate its balance sheet, if the need arose. But it's clear that we should definitely closely examine whether it can manage its debt without dilution. Despite its noteworthy liabilities, Therapeutics 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 Therapeutics'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 Therapeutics wasn't profitable at an EBIT level, but managed to grow its revenue by 52%, to US$472m. With any luck the company will be able to grow its way to profitability.
So How Risky Is Therapeutics?
By their very nature companies that are losing money are more risky than those with a long history of profitability. And we do note that Therapeutics had an earnings before interest and tax (EBIT) loss, over the last year. And over the same period it saw negative free cash outflow of US$250m and booked a US$391m accounting loss. While this does make the company a bit risky, it's important to remember it has net cash of US$516.6m. That means it could keep spending at its current rate for more than two years. With very solid revenue growth in the last year, Therapeutics may be on a path to profitability. Pre-profit companies are often risky, but they can also offer great rewards. The balance sheet is clearly the area to focus on when you are analysing debt. However, not all investment risk resides within the balance sheet - far from it. For example - Therapeutics has 2 warning signs we think you should be aware of.
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.
What are the risks and opportunities for PTC Therapeutics?
Trading at 81.7% below our estimate of its fair value
Revenue is forecast to grow 10.7% per year
Negative shareholders equity
Shareholders have been diluted in the past year
Significant insider selling over the past 3 months
Currently unprofitable and not forecast to become profitable over the next 3 years
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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