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 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 SCYNEXIS, Inc. (NASDAQ:SCYX) does have debt on its balance sheet. But is this debt a concern to shareholders?
When Is Debt A Problem?
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. Part and parcel of capitalism is the process of 'creative destruction' where failed businesses are mercilessly liquidated by their bankers. However, a more usual (but still expensive) situation is where a company must dilute shareholders at a cheap share price simply to get debt under control. Of course, the upside of debt is that it often represents cheap capital, especially when it replaces dilution in a company with the ability to reinvest at high rates of return. The first step when considering a company's debt levels is to consider its cash and debt together.
What Is SCYNEXIS's Debt?
As you can see below, at the end of December 2020, SCYNEXIS had US$13.8m of debt, up from US$8.32m a year ago. Click the image for more detail. But on the other hand it also has US$93.0m in cash, leading to a US$79.2m net cash position.
How Strong Is SCYNEXIS' Balance Sheet?
According to the last reported balance sheet, SCYNEXIS had liabilities of US$26.4m due within 12 months, and liabilities of US$53.4m due beyond 12 months. On the other hand, it had cash of US$93.0m and US$2.88m worth of receivables due within a year. So it can boast US$16.1m more liquid assets than total liabilities.
This short term liquidity is a sign that SCYNEXIS could probably pay off its debt with ease, as its balance sheet is far from stretched. Simply put, the fact that SCYNEXIS has more cash than debt is arguably a good indication that it can manage its debt safely. 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 SCYNEXIS can strengthen its balance sheet over time. So if you're focused on the future you can check out this free report showing analyst profit forecasts.
Given it has no significant operating revenue at the moment, shareholders will be hoping SCYNEXIS can make progress and gain better traction for the business, before it runs low on cash.
So How Risky Is SCYNEXIS?
We have no doubt that loss making companies are, in general, riskier than profitable ones. And in the last year SCYNEXIS 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$49m and booked a US$55m accounting loss. With only US$79.2m on the balance sheet, it would appear that its going to need to raise capital again soon. 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. The balance sheet is clearly the area to focus on when you are analysing debt. But ultimately, every company can contain risks that exist outside of the balance sheet. Be aware that SCYNEXIS is showing 2 warning signs in our investment analysis , 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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What are the risks and opportunities for SCYNEXIS?
Trading at 98.9% below our estimate of its fair value
Revenue is forecast to grow 58.26% per year
Has less than 1 year of cash runway
Does not have a meaningful market cap ($53M)
Shareholders have been diluted in the past year
Does not have meaningful revenue ($4M)
Volatile share price 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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