Is scPharmaceuticals (NASDAQ:SCPH) Using Too Much Debt?

Warren Buffett famously said, '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. We note that scPharmaceuticals Inc. (NASDAQ:SCPH) does have debt on its balance sheet. But is this debt a concern to shareholders?

When Is Debt A Problem?

Debt and other liabilities become risky for a business when it cannot easily fulfill those obligations, either with free cash flow or by raising capital at an attractive price. Ultimately, if the company can't fulfill its legal obligations to repay debt, shareholders could walk away with nothing. 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 scPharmaceuticals

What Is scPharmaceuticals's Net Debt?

You can click the graphic below for the historical numbers, but it shows that as of March 2024 scPharmaceuticals had US$39.4m of debt, an increase on US$37.3m, over one year. However, it does have US$59.0m in cash offsetting this, leading to net cash of US$19.6m.

A Look At scPharmaceuticals' Liabilities

The latest balance sheet data shows that scPharmaceuticals had liabilities of US$12.3m due within a year, and liabilities of US$41.6m falling due after that. On the other hand, it had cash of US$59.0m and US$5.77m worth of receivables due within a year. So it actually has US$10.9m more liquid assets than total liabilities.

This short term liquidity is a sign that scPharmaceuticals could probably pay off its debt with ease, as its balance sheet is far from stretched. Succinctly put, scPharmaceuticals boasts net cash, so it's fair to say it does not have a heavy debt load! There's no doubt that we learn most about debt from the balance sheet. 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.

Over 12 months, scPharmaceuticals reported revenue of US$18m, which is a gain of 755%, although it did not report any earnings before interest and tax. When it comes to revenue growth, that's like nailing the game winning 3-pointer!

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 in the last year scPharmaceuticals had an earnings before interest and tax (EBIT) loss, truth be told. And over the same period it saw negative free cash outflow of US$60m and booked a US$58m accounting loss. Given it only has net cash of US$19.6m, the company may need to raise more capital if it doesn't reach break-even soon. Importantly, scPharmaceuticals's revenue growth is hot to trot. While unprofitable companies can be risky, they can also grow hard and fast in those pre-profit years. 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, we've discovered 2 warning signs for scPharmaceuticals that you should be aware of before investing here.

Of course, if you're the type of investor who prefers buying stocks without the burden of debt, then don't hesitate to discover our exclusive list of net cash growth stocks, today.

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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.

Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team@simplywallst.com