NASDAQ:LPCN) does have debt on its balance sheet. But should shareholders be worried about its use of debt?” data-reactid=”28″ type=”text”>Howard Marks put it nicely when he said that, rather than worrying about share price volatility, ‘The possibility of permanent loss is the risk I worry about… and every practical investor I know worries about.’ 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 Lipocine Inc. (NASDAQ:LPCN) does have debt on its balance sheet. But should shareholders be worried about its use of debt?
When Is Debt Dangerous?
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. Part and parcel of capitalism is the process of ‘creative destruction’ where failed businesses are mercilessly liquidated by their bankers. 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, plenty of companies use debt to fund growth, without any negative consequences. The first thing to do when considering how much debt a business uses is to look at its cash and debt together.
What Is Lipocine’s Debt?
The image below, which you can click on for greater detail, shows that Lipocine had debt of US$6.33m at the end of June 2020, a reduction from US$8.72m over a year. However, its balance sheet shows it holds US$18.3m in cash, so it actually has US$12.0m net cash.
How Healthy Is Lipocine’s Balance Sheet?
free report showing analyst profit forecasts.” data-reactid=”52″ type=”text”>This surplus suggests that Lipocine has a conservative balance sheet, and could probably eliminate its debt without much difficulty. Succinctly put, Lipocine 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 it is future earnings, more than anything, that will determine Lipocine’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.
Given it has no significant operating revenue at the moment, shareholders will be hoping Lipocine can make progress and gain better traction for the business, before it runs low on cash.
So How Risky Is Lipocine?
4 warning signs (and 2 which don’t sit too well with us) we think you should know about.” data-reactid=”55″ type=”text”>Statistically speaking companies that lose money are riskier than those that make money. And the fact is that over the last twelve months Lipocine lost money at the earnings before interest and tax (EBIT) line. And over the same period it saw negative free cash outflow of US$13.6m and booked a US$18.5m accounting loss. However, it has net cash of US$12.0m, so it has a bit of time before it will need more capital. Importantly, Lipocine’s revenue growth is hot to trot. While unprofitable companies can be risky, they can also grow hard and fast in those pre-profit years. The balance sheet is clearly the area to focus on when you are analysing debt. But ultimately, every company can contain risks that exist outside of the balance sheet. Take risks, for example – Lipocine has 4 warning signs (and 2 which don’t sit too well with us) we think you should know about.
our special list of such companies (all with a track record of profit growth). It’s free.” data-reactid=”60″ type=”text”>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. 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.