David Iben put it well when he said, ‘Volatility is not a risk we care about. What we care about is avoiding the permanent loss of capital.’ 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 can see that Revance Therapeutics, Inc. (NASDAQ:RVNC) does use debt in its business. But should shareholders be worried about its use of debt?
When Is Debt Dangerous?
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. Ultimately, if the company can’t fulfill its legal obligations to repay debt, shareholders could walk away with nothing. However, a more frequent (but still costly) occurrence is where a company must issue shares at bargain-basement prices, permanently diluting shareholders, just to shore up its balance sheet. Of course, plenty of companies use debt to fund growth, without any negative consequences. When we think about a company’s use of debt, we first look at cash and debt together.
How Much Debt Does Revance Therapeutics Carry?
The image below, which you can click on for greater detail, shows that at June 2021 Revance Therapeutics had debt of US$280.0m, up from US$174.3m in one year. However, its balance sheet shows it holds US$336.3m in cash, so it actually has US$56.3m net cash.
How Strong Is Revance Therapeutics’ Balance Sheet?
The latest balance sheet data shows that Revance Therapeutics had liabilities of US$58.2m due within a year, and liabilities of US$396.4m falling due after that. On the other hand, it had cash of US$336.3m and US$641.0k worth of receivables due within a year. So its liabilities total US$117.7m more than the combination of its cash and short-term receivables.
Given Revance Therapeutics has a market capitalization of US$1.03b, it’s hard to believe these liabilities pose much threat. However, we do think it is worth keeping an eye on its balance sheet strength, as it may change over time. Despite its noteworthy liabilities, Revance 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 Revance Therapeutics’s ability to maintain a healthy balance sheet going forward.
Over 12 months, Revance Therapeutics reported revenue of US$47m, which is a gain of 9,467%, although it did not report any earnings before interest and tax. That’s virtually the hole-in-one of revenue growth!
So How Risky Is Revance Therapeutics?
Statistically speaking companies that lose money are riskier than those that make money. And in the last year Revance Therapeutics 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$250m and booked a US$303m accounting loss. While this does make the company a bit risky, it’s important to remember it has net cash of US$56.3m. That kitty means the company can keep spending for growth for at least two years, at current rates. The good news for shareholders is that Revance Therapeutics 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.