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 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 Lipocine Inc. (NASDAQ:LPCN) makes use of debt. But the real question is whether this debt is making the company risky.

When Is Debt A Problem?

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 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, 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 thing to do when considering how much debt a business uses is to look at its cash and debt together.

What Is Lipocine’s Debt?

As you can see below, Lipocine had US$3.96m of debt at June 2021, down from US$6.33m a year prior. But on the other hand it also has US$46.6m in cash, leading to a US$42.7m net cash position.

A Look At Lipocine’s Liabilities

According to the last reported balance sheet, Lipocine had liabilities of US$8.81m due within 12 months, and liabilities of US$2.63m due beyond 12 months. Offsetting this, it had US$46.6m in cash and US$232.6k in receivables that were due within 12 months. So it actually has US$35.4m more liquid assets than total liabilities.

It’s good to see that Lipocine has plenty of liquidity on its balance sheet, suggesting conservative management of liabilities. Due to its strong net asset position, it is not likely to face issues with its lenders. Succinctly put, Lipocine boasts net cash, so it’s fair to say it does not have a heavy debt load! The balance sheet is clearly the area to focus on when you are analysing debt. But it is future earnings, more than anything, that will determine Lipocine’s ability to maintain a healthy balance sheet going forward.

Given it has no significant operating revenue at the moment, shareholders will be hoping Lipocine can make progress and gain better traction for the business, before it runs low on cash.

So How Risky Is Lipocine?

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 Lipocine had an earnings before interest and tax (EBIT) loss, truth be told. Indeed, in that time it burnt through US$14m of cash and made a loss of US$19m. However, it has net cash of US$42.7m, so it has a bit of time before it will need more capital. 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. There’s no doubt that we learn most about debt from the balance sheet.