Is RVL Pharmaceuticals (NASDAQ:RVLP) Using Debt Sensibly?

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.' 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. Importantly, RVL Pharmaceuticals plc (NASDAQ:RVLP) does carry debt. But should shareholders be worried about its use of debt?

When Is Debt Dangerous?

Debt assists a business until the business has trouble paying it off, either with new capital or with free cash flow. Part and parcel of capitalism is the process of 'creative destruction' where failed businesses are mercilessly liquidated by their bankers. 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 step when considering a company's debt levels is to consider its cash and debt together.

Check out our latest analysis for RVL Pharmaceuticals

How Much Debt Does RVL Pharmaceuticals Carry?

You can click the graphic below for the historical numbers, but it shows that as of September 2022 RVL Pharmaceuticals had US$55.9m of debt, an increase on US$29.9m, over one year. But on the other hand it also has US$59.8m in cash, leading to a US$3.85m net cash position.

How Strong Is RVL Pharmaceuticals' Balance Sheet?

The latest balance sheet data shows that RVL Pharmaceuticals had liabilities of US$21.5m due within a year, and liabilities of US$65.3m falling due after that. Offsetting this, it had US$59.8m in cash and US$3.28m in receivables that were due within 12 months. So its liabilities total US$23.8m more than the combination of its cash and short-term receivables.

This deficit isn't so bad because RVL Pharmaceuticals is worth US$112.0m, and thus could probably raise enough capital to shore up its balance sheet, if the need arose. But we definitely want to keep our eyes open to indications that its debt is bringing too much risk. While it does have liabilities worth noting, RVL Pharmaceuticals also has more cash than debt, so we're pretty confident it can manage its debt safely. 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 RVL Pharmaceuticals'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.

Over 12 months, RVL Pharmaceuticals reported revenue of US$43m, which is a gain of 171%, although it did not report any earnings before interest and tax. So there's no doubt that shareholders are cheering for growth

So How Risky Is RVL Pharmaceuticals?

By their very nature companies that are losing money are more risky than those with a long history of profitability. And the fact is that over the last twelve months RVL Pharmaceuticals lost money at the earnings before interest and tax (EBIT) line. Indeed, in that time it burnt through US$46m of cash and made a loss of US$53m. Given it only has net cash of US$3.85m, the company may need to raise more capital if it doesn't reach break-even soon. Importantly, RVL Pharmaceuticals's revenue growth is hot to trot. High growth pre-profit companies may well be 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. These risks can be hard to spot. Every company has them, and we've spotted 1 warning sign for RVL Pharmaceuticals you should know about.

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.