Is scPharmaceuticals (NASDAQ:SCPH) A Risky Investment?

Howard Marks put it nicely when he said that, rather than worrying about share price volatility, 'The possibility of permanent loss is the risk I worry about... and every practical investor I know worries about.' 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. We can see that scPharmaceuticals Inc. (NASDAQ:SCPH) does use debt in its business. But is this debt a concern to shareholders?

When Is Debt Dangerous?

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. If things get really bad, the lenders can take control of the business. 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, 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.

See our latest analysis for scPharmaceuticals

What Is scPharmaceuticals's Net Debt?

The chart below, which you can click on for greater detail, shows that scPharmaceuticals had US$19.4m in debt in June 2021; about the same as the year before. However, it does have US$90.0m in cash offsetting this, leading to net cash of US$70.6m.

How Healthy Is scPharmaceuticals' Balance Sheet?

Zooming in on the latest balance sheet data, we can see that scPharmaceuticals had liabilities of US$11.9m due within 12 months and liabilities of US$12.7m due beyond that. On the other hand, it had cash of US$90.0m and US$112.0k worth of receivables due within a year. So it can boast US$65.6m more liquid assets than total liabilities.

This luscious liquidity implies that scPharmaceuticals' balance sheet is sturdy like a giant sequoia tree. With this in mind one could posit that its balance sheet means the company is able to handle some adversity. Simply put, the fact that scPharmaceuticals has more cash than debt is arguably a good indication that 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 scPharmaceuticals 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.

Given it has no significant operating revenue at the moment, shareholders will be hoping scPharmaceuticals can make progress and gain better traction for the business, before it runs low on cash.

So How Risky Is scPharmaceuticals?

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 scPharmaceuticals lost money at the earnings before interest and tax (EBIT) line. Indeed, in that time it burnt through US$29m of cash and made a loss of US$31m. However, it has net cash of US$70.6m, so it has a bit of time before it will need more capital. Even though its balance sheet seems sufficiently liquid, debt always makes us a little nervous if a company doesn't produce free cash flow regularly. 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. These risks can be hard to spot. Every company has them, and we've spotted 2 warning signs for scPharmaceuticals (of which 1 makes us a bit uncomfortable!) you should know about.

At the end of the day, it's often better to focus on companies that are free from net debt. You can access our special list of such companies (all with a track record of profit growth). It's free.

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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.
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