Yahoo Finance Health Check: How Prudently Does Retrophin (NASDAQ:RTRX) Use Debt?
The external fund manager backed by Berkshire Hathaway's Charlie Munger, Li Lu, makes no bones about it when he says '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 Retrophin, Inc. (NASDAQ:RTRX) makes use of debt. But is this debt a concern to shareholders?
Why Does Debt Bring Risk?
Debt and other liabilities become risky for a business when it cannot easily fulfill those obligations, either with free cash flow or by raising capital at an attractive price. Part and parcel of capitalism is the process of 'creative destruction' where failed businesses are mercilessly liquidated by their bankers. 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, 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 Retrophin
What Is Retrophin's Debt?
As you can see below, Retrophin had US$202.4m of debt at September 2019, down from US$215.1m a year prior. However, it does have US$407.0m in cash offsetting this, leading to net cash of US$204.7m.
How Healthy Is Retrophin's Balance Sheet?
The latest balance sheet data shows that Retrophin had liabilities of US$88.0m due within a year, and liabilities of US$279.8m falling due after that. Offsetting this, it had US$407.0m in cash and US$16.8m in receivables that were due within 12 months. So it can boast US$55.9m more liquid assets than total liabilities.
This short term liquidity is a sign that Retrophin could probably pay off its debt with ease, as its balance sheet is far from stretched. Simply put, the fact that Retrophin 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 Retrophin's ability to maintain a healthy balance sheet going forward. 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 Retrophin wasn't profitable at an EBIT level, but managed to grow its revenue by 6.0%, to US$172m. We usually like to see faster growth from unprofitable companies, but each to their own.
So How Risky Is Retrophin?
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 Retrophin lost money at the earnings before interest and tax (EBIT) line. Indeed, in that time it burnt through US$73m of cash and made a loss of US$124m. But the saving grace is the US$204.7m on the balance sheet. That kitty means the company can keep spending for growth for at least two years, at current rates. 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. But ultimately, every company can contain risks that exist outside of the balance sheet. For example, we've discovered 3 warning signs for Retrophin that you should be aware of before investing here.
If you're interested in investing in businesses that can grow profits without the burden of debt, then check out this free list of growing businesses that have net cash on the balance sheet.
If you spot an error that warrants correction, please contact the editor at editorial-team@simplywallst.com. 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. Simply Wall St has no position in the stocks mentioned.
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