Yahoo Finance Despite Lacking Profits ChemoCentryx (NASDAQ:CCXI) Seems To Be On Top Of Its Debt
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. As with many other companies ChemoCentryx, Inc. (NASDAQ:CCXI) makes use of debt. But the more important question is: how much risk is that debt creating?
When Is Debt A Problem?
Debt assists a business until the business has trouble paying it off, either with new capital or with free cash flow. If things get really bad, the lenders can take control of the business. 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.
View our latest analysis for ChemoCentryx
What Is ChemoCentryx's Net Debt?
You can click the graphic below for the historical numbers, but it shows that as of June 2020 ChemoCentryx had US$24.3m of debt, an increase on US$19.7m, over one year. However, its balance sheet shows it holds US$504.6m in cash, so it actually has US$480.4m net cash.
How Healthy Is ChemoCentryx's Balance Sheet?
Zooming in on the latest balance sheet data, we can see that ChemoCentryx had liabilities of US$56.4m due within 12 months and liabilities of US$64.5m due beyond that. On the other hand, it had cash of US$504.6m and US$228.0k worth of receivables due within a year. So it actually has US$383.9m more liquid assets than total liabilities.
This short term liquidity is a sign that ChemoCentryx could probably pay off its debt with ease, as its balance sheet is far from stretched. Simply put, the fact that ChemoCentryx has more cash than debt is arguably a good indication that it can manage its debt safely. The balance sheet is clearly the area to focus on when you are analysing debt. But ultimately the future profitability of the business will decide if ChemoCentryx can strengthen its balance sheet over time. So if you're focused on the future you can check out this free report showing analyst profit forecasts.
In the last year ChemoCentryx wasn't profitable at an EBIT level, but managed to grow its revenue by 125%, to US$76m. So there's no doubt that shareholders are cheering for growth
So How Risky Is ChemoCentryx?
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 ChemoCentryx lost money at the earnings before interest and tax (EBIT) line. And over the same period it saw negative free cash outflow of US$85m and booked a US$30m accounting loss. But at least it has US$480.4m on the balance sheet to spend on growth, near-term. Importantly, ChemoCentryx's revenue growth is hot to trot. High growth pre-profit companies may well be risky, but they can also offer great rewards. There's no doubt that we learn most about debt from the balance sheet. However, not all investment risk resides within the balance sheet - far from it. Consider risks, for instance. Every company has them, and we've spotted 1 warning sign for ChemoCentryx you should know about.
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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