Is Zevra Therapeutics (NASDAQ:ZVRA) Using Debt In A Risky Way?

Legendary fund manager Li Lu (who Charlie Munger backed) once said, '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. As with many other companies Zevra Therapeutics, Inc. (NASDAQ:ZVRA) makes use of debt. But should shareholders be worried about its use of debt?

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 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. 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 Zevra Therapeutics

What Is Zevra Therapeutics's Debt?

The image below, which you can click on for greater detail, shows that at September 2022 Zevra Therapeutics had debt of US$15.6m, up from none in one year. However, it does have US$75.9m in cash offsetting this, leading to net cash of US$60.3m.

A Look At Zevra Therapeutics' Liabilities

We can see from the most recent balance sheet that Zevra Therapeutics had liabilities of US$8.43m falling due within a year, and liabilities of US$17.3m due beyond that. On the other hand, it had cash of US$75.9m and US$6.58m worth of receivables due within a year. So it actually has US$56.7m more liquid assets than total liabilities.

This luscious liquidity implies that Zevra Therapeutics' balance sheet is sturdy like a giant sequoia tree. On this view, lenders should feel as safe as the beloved of a black-belt karate master. Succinctly put, Zevra Therapeutics 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 it is future earnings, more than anything, that will determine Zevra 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.

Over 12 months, Zevra Therapeutics made a loss at the EBIT level, and saw its revenue drop to US$11m, which is a fall of 62%. That makes us nervous, to say the least.

So How Risky Is Zevra Therapeutics?

We have no doubt that loss making companies are, in general, riskier than profitable ones. And we do note that Zevra Therapeutics had an earnings before interest and tax (EBIT) loss, over the last year. Indeed, in that time it burnt through US$15m of cash and made a loss of US$35m. Given it only has net cash of US$60.3m, the company may need to raise more capital if it doesn't reach break-even 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. When I consider a company to be a bit risky, I think it is responsible to check out whether insiders have been reporting any share sales. Luckily, you can click here ito see our graphic depicting Zevra Therapeutics insider transactions.

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.