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. We note that Xeris Pharmaceuticals, Inc. (NASDAQ:XERS) does have debt on its balance sheet. But the more important question is: how much risk is that debt creating?
What Risk Does Debt Bring?
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. 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. Of course, debt can be an important tool in businesses, particularly capital heavy businesses. When we think about a company’s use of debt, we first look at cash and debt together.
View our latest analysis for Xeris Pharmaceuticals
What Is Xeris Pharmaceuticals’s Net Debt?
You can click the graphic below for the historical numbers, but it shows that as of June 2020 Xeris Pharmaceuticals had US$109.5m of debt, an increase on US$32.4m, over one year. However, its balance sheet shows it holds US$144.0m in cash, so it actually has US$34.5m net cash.
How Healthy Is Xeris Pharmaceuticals’s Balance Sheet?
Zooming in on the latest balance sheet data, we can see that Xeris Pharmaceuticals had liabilities of US$22.8m due within 12 months and liabilities of US$118.6m due beyond that. On the other hand, it had cash of US$144.0m and US$3.87m worth of receivables due within a year. So it actually has US$6.44m more liquid assets than total liabilities.
This surplus suggests that Xeris Pharmaceuticals has a conservative balance sheet, and could probably eliminate its debt without much difficulty. Simply put, the fact that Xeris Pharmaceuticals 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 Xeris Pharmaceuticals’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.
In the last year Xeris Pharmaceuticals wasn’t profitable at an EBIT level, but managed to grow its revenue by 218%, to US$6.0m. That’s virtually the hole-in-one of revenue growth!
So How Risky Is Xeris Pharmaceuticals?
Statistically speaking companies that lose money are riskier than those that make money. And the fact is that over the last twelve months Xeris Pharmaceuticals lost money at the earnings before interest and tax (EBIT) line. Indeed, in that time it burnt through US$114m of cash and made a loss of US$119m. With only US$34.5m on the balance sheet, it would appear that its going to need to raise capital again soon. Importantly, Xeris Pharmaceuticals’s revenue growth is hot to trot. High growth pre-profit companies may well be risky, but they can also offer great rewards. The balance sheet is clearly the area to focus on when you are analysing debt. However, not all investment risk resides within the balance sheet – far from it. Consider for instance, the ever-present spectre of investment risk. We’ve identified 3 warning signs with Xeris Pharmaceuticals (at least 1 which doesn’t sit too well with us) , and understanding them should be part of your investment process.
When all is said and done, sometimes its easier to focus on companies that don’t even need debt. Readers can access a list of growth stocks with zero net debt 100% free, right now.
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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