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 ChemoCentryx, Inc. (NASDAQ:CCXI) does use debt in its business. But the real question is whether this debt is making the company risky.
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. While that is not too common, we often do see indebted companies permanently diluting shareholders because lenders force them to raise capital at a distressed price. Having said that, the most common situation is where a company manages its debt reasonably well - and to its own advantage. When we examine debt levels, we first consider both cash and debt levels, together.
How Much Debt Does ChemoCentryx Carry?
The chart below, which you can click on for greater detail, shows that ChemoCentryx had US$24.5m in debt in March 2021; about the same as the year before. But it also has US$376.3m in cash to offset that, meaning it has US$351.8m net cash.
How Strong Is ChemoCentryx's Balance Sheet?
According to the last reported balance sheet, ChemoCentryx had liabilities of US$54.7m due within 12 months, and liabilities of US$83.4m due beyond 12 months. Offsetting this, it had US$376.3m in cash and US$10.1m in receivables that were due within 12 months. So it actually has US$248.3m more liquid assets than total liabilities.
This surplus suggests that ChemoCentryx is using debt in a way that is appears to be both safe and conservative. Because it has plenty of assets, it is unlikely to have trouble with its lenders. Simply put, the fact that ChemoCentryx 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 ChemoCentryx's ability to maintain a healthy balance sheet going forward. 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, ChemoCentryx reported revenue of US$69m, which is a gain of 105%, although it did not report any earnings before interest and tax. So its pretty obvious shareholders are hoping for more growth!
So How Risky Is ChemoCentryx?
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 ChemoCentryx 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$101m and booked a US$63m accounting loss. But at least it has US$351.8m on the balance sheet to spend on growth, near-term. The good news for shareholders is that ChemoCentryx has dazzling revenue growth, so there's a very good chance it can boost its free cash flow in the years to come. 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. But ultimately, every company can contain risks that exist outside of the balance sheet. Case in point: We've spotted 3 warning signs for ChemoCentryx you should be aware of.
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.
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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