Is Trevi Therapeutics (NASDAQ:TRVI) Using Too Much Debt?

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.' 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 Trevi Therapeutics, Inc. (NASDAQ:TRVI) does use debt in its business. But is this debt a concern to shareholders?

What Risk Does Debt Bring?

Debt is a tool to help businesses grow, but if a business is incapable of paying off its lenders, then it exists at their mercy. 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. 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. When we think about a company's use of debt, we first look at cash and debt together.

Check out our latest analysis for Trevi Therapeutics

What Is Trevi Therapeutics's Net Debt?

The chart below, which you can click on for greater detail, shows that Trevi Therapeutics had US$14.5m in debt in December 2021; about the same as the year before. However, it does have US$36.8m in cash offsetting this, leading to net cash of US$22.3m.

A Look At Trevi Therapeutics' Liabilities

According to the last reported balance sheet, Trevi Therapeutics had liabilities of US$12.7m due within 12 months, and liabilities of US$8.68m due beyond 12 months. Offsetting these obligations, it had cash of US$36.8m as well as receivables valued at US$59.0k due within 12 months. So it can boast US$15.5m more liquid assets than total liabilities.

This excess liquidity suggests that Trevi Therapeutics is taking a careful approach to debt. Because it has plenty of assets, it is unlikely to have trouble with its lenders. Simply put, the fact that Trevi Therapeutics 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 it is future earnings, more than anything, that will determine Trevi Therapeutics'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.

It seems likely shareholders hope that Trevi Therapeutics can significantly advance the business plan before too long, because it doesn't have any significant revenue at the moment.

So How Risky Is Trevi Therapeutics?

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 Trevi Therapeutics lost money at the earnings before interest and tax (EBIT) line. And over the same period it saw negative free cash outflow of US$29m and booked a US$34m accounting loss. But at least it has US$22.3m on the balance sheet to spend on growth, near-term. Overall, its balance sheet doesn't seem overly risky, at the moment, but we're always cautious until we see the positive free cash flow. 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. Case in point: We've spotted 6 warning signs for Trevi Therapeutics you should be aware of, and 3 of them are concerning.

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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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.