David Iben put it well when he said, 'Volatility is not a risk we care about. What we care about is avoiding the 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 can see that PTC Therapeutics, Inc. (NASDAQ:PTCT) does use debt in its business. But is this debt a concern to shareholders?
What Risk Does Debt Bring?
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. 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. When we examine debt levels, we first consider both cash and debt levels, together.
What Is Therapeutics's Net Debt?
As you can see below, Therapeutics had US$309.1m of debt, at December 2020, which is about the same as the year before. You can click the chart for greater detail. But it also has US$1.10b in cash to offset that, meaning it has US$794.5m net cash.
How Strong Is Therapeutics' Balance Sheet?
The latest balance sheet data shows that Therapeutics had liabilities of US$277.3m due within a year, and liabilities of US$1.45b falling due after that. On the other hand, it had cash of US$1.10b and US$69.9m worth of receivables due within a year. So its liabilities total US$552.7m more than the combination of its cash and short-term receivables.
Given Therapeutics has a market capitalization of US$4.01b, it's hard to believe these liabilities pose much threat. But there are sufficient liabilities that we would certainly recommend shareholders continue to monitor the balance sheet, going forward. While it does have liabilities worth noting, Therapeutics also has more cash than debt, so we're pretty confident it can manage its debt safely. The balance sheet is clearly the area to focus on when you are analysing debt. But ultimately the future profitability of the business will decide if Therapeutics 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, Therapeutics reported revenue of US$381m, which is a gain of 24%, although it did not report any earnings before interest and tax. With any luck the company will be able to grow its way to profitability.
So How Risky Is Therapeutics?
We have no doubt that loss making companies are, in general, riskier than profitable ones. And we do note that Therapeutics had an earnings before interest and tax (EBIT) loss, over the last year. Indeed, in that time it burnt through US$250m of cash and made a loss of US$438m. While this does make the company a bit risky, it's important to remember it has net cash of US$794.5m. That means it could keep spending at its current rate for more than two years. Therapeutics'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. But ultimately, every company can contain risks that exist outside of the balance sheet. For example, we've discovered 4 warning signs for Therapeutics that you should be aware of before investing here.
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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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. 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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