Some say volatility, rather than debt, is the best way to think about risk as an investor, but Warren Buffett famously said that ‘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. We note that Travere Therapeutics, Inc. (NASDAQ:TVTX) does have debt on its balance sheet. But the real question is whether this debt is making the company risky.
When Is Debt Dangerous?
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. While that is not too common, we often do see indebted companies permanently diluting shareholders because lenders force them to raise capital at a distressed price. 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.
Check out our latest analysis for Travere Therapeutics
What Is Travere Therapeutics’s Net Debt?
You can click the graphic below for the historical numbers, but it shows that as of June 2021 Travere Therapeutics had US$220.9m of debt, an increase on US$210.0m, over one year. However, it does have US$522.8m in cash offsetting this, leading to net cash of US$301.9m.
How Strong Is Travere Therapeutics’ Balance Sheet?
The latest balance sheet data shows that Travere Therapeutics had liabilities of US$97.0m due within a year, and liabilities of US$317.5m falling due after that. Offsetting this, it had US$522.8m in cash and US$12.3m in receivables that were due within 12 months. So it can boast US$120.6m more liquid assets than total liabilities.
This short term liquidity is a sign that Travere Therapeutics could probably pay off its debt with ease, as its balance sheet is far from stretched. Succinctly put, Travere Therapeutics 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 Travere Therapeutics 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.
Over 12 months, Travere Therapeutics reported revenue of US$204m, which is a gain of 9.0%, although it did not report any earnings before interest and tax. That rate of growth is a bit slow for our taste, but it takes all types to make a world.
So How Risky Is Travere Therapeutics?
We have no doubt that loss making companies are, in general, riskier than profitable ones. And the fact is that over the last twelve months Travere Therapeutics lost money at the earnings before interest and tax (EBIT) line. And over the same period it saw negative free cash outflow of US$56m and booked a US$237m accounting loss. While this does make the company a bit risky, it’s important to remember it has net cash of US$301.9m. That kitty means the company can keep spending for growth for at least two years, at current rates. Overall, its balance sheet doesn’t seem overly risky, at the moment, but we’re always cautious until we see the positive free cash flow. 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. Be aware that Travere Therapeutics is showing 4 warning signs in our investment analysis , you should know about…
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.
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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