Warren Buffett famously said, ‘Volatility is far from synonymous with risk.’ 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. Importantly, Liquidia Corporation (NASDAQ:LQDA) does carry debt. But the more important question is: how much risk is that debt creating?
Why Does Debt Bring Risk?
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. In the worst case scenario, a company can go bankrupt if it cannot pay its creditors. 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. Of course, debt can be an important tool in businesses, particularly capital heavy businesses. The first thing to do when considering how much debt a business uses is to look at its cash and debt together.
What Is Liquidia’s Debt?
The image below, which you can click on for greater detail, shows that Liquidia had debt of US$10.3m at the end of June 2021, a reduction from US$13.1m over a year. But on the other hand it also has US$67.9m in cash, leading to a US$57.6m net cash position.
How Healthy Is Liquidia’s Balance Sheet?
The latest balance sheet data shows that Liquidia had liabilities of US$6.97m due within a year, and liabilities of US$18.4m falling due after that. On the other hand, it had cash of US$67.9m and US$2.99m worth of receivables due within a year. So it actually has US$45.5m more liquid assets than total liabilities.
This excess liquidity suggests that Liquidia is taking a careful approach to debt. Because it has plenty of assets, it is unlikely to have trouble with its lenders. Succinctly put, Liquidia 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 ultimately the future profitability of the business will decide if Liquidia can strengthen its balance sheet over time.
In the last year Liquidia managed to produce its first revenue as a listed company, but given the lack of profit, shareholders will no doubt be hoping to see some strong increases.
So How Risky Is Liquidia?
We have no doubt that loss making companies are, in general, riskier than profitable ones. And we do note that Liquidia had an earnings before interest and tax (EBIT) loss, over the last year. And over the same period it saw negative free cash outflow of US$47m and booked a US$47m accounting loss. Given it only has net cash of US$57.6m, the company may need to raise more capital if it doesn’t reach break-even soon. 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. When analysing debt levels, the balance sheet is the obvious place to start.
