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Warren Buffett famously said, 'Volatility is far from synonymous with risk.' 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 Delcath Systems, Inc. (NASDAQ:DCTH) makes use of debt. But the more important question is: how much risk is that debt creating?
Why Does Debt Bring Risk?
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 common (but still painful) scenario is that it has to raise new equity capital at a low price, thus permanently diluting shareholders. 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 Delcath Systems Carry?
You can click the graphic below for the historical numbers, but it shows that as of September 2021 Delcath Systems had US$15.4m of debt, an increase on US$2.00m, over one year. But it also has US$24.9m in cash to offset that, meaning it has US$9.43m net cash.
A Look At Delcath Systems' Liabilities
Zooming in on the latest balance sheet data, we can see that Delcath Systems had liabilities of US$5.36m due within 12 months and liabilities of US$17.3m due beyond that. Offsetting these obligations, it had cash of US$24.9m as well as receivables valued at US$69.0k due within 12 months. So it actually has US$2.24m more liquid assets than total liabilities.
This surplus suggests that Delcath Systems has a conservative balance sheet, and could probably eliminate its debt without much difficulty. Succinctly put, Delcath Systems boasts net cash, so it's fair to say it does not have a heavy debt load! When analysing debt levels, the balance sheet is the obvious place to start. But ultimately the future profitability of the business will decide if Delcath Systems can strengthen its balance sheet over time. So if you want to see what the professionals think, you might find this free report on analyst profit forecasts to be interesting.
In the last year Delcath Systems wasn't profitable at an EBIT level, but managed to grow its revenue by 18%, to US$2.0m. That rate of growth is a bit slow for our taste, but it takes all types to make a world.
So How Risky Is Delcath Systems?
By their very nature companies that are losing money are more risky than those with a long history of profitability. And the fact is that over the last twelve months Delcath Systems lost money at the earnings before interest and tax (EBIT) line. And over the same period it saw negative free cash outflow of US$22m and booked a US$27m accounting loss. With only US$9.43m on the balance sheet, it would appear that its going to need to raise capital again soon. 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. When analysing debt levels, the balance sheet is the obvious place to start. But ultimately, every company can contain risks that exist outside of the balance sheet. To that end, you should learn about the 4 warning signs we've spotted with Delcath Systems (including 1 which is significant) .
At the end of the day, it's often better to focus on companies that are free from net debt. You can access our special list of such companies (all with a track record of profit growth). It's free.
This article by Simply Wall St is general in nature. We provide commentary based on historical data and analyst forecasts only using an unbiased methodology and our articles are not intended to be financial advice. 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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