Health Check: How Cautiously Does Therapeutics (NASDAQ: PTCT) Use Debt?


Some say volatility, rather than debt, is the best way to think about risk as an investor, but Warren Buffett said “volatility is far from risk.” So it seems like smart money knows that debt – which is usually involved in bankruptcies – is a very important factor, when you assess the level of risk of a business. Like many other companies PTC Therapeutics, Inc. (NASDAQ: PTCT) uses debt. But does this debt concern shareholders?

Why Does Debt Bring Risk?

Debt is a tool to help businesses grow, but if a business is unable to repay its lenders, then it exists at their mercy. If things really go wrong, lenders can take over the business. While it’s not too common, we often see indebted companies continually diluting their shareholders because lenders are forcing them to raise capital at a ridiculous price. Of course, many companies use debt to finance their growth without negative consequences. The first thing to do when considering how much debt a business uses is to look at its cash flow and debt together.

See our latest review for Therapeutics

What is Therapeutics’ net debt?

The image below, which you can click for more details, shows that as of June 2021, Therapeutics was in debt of $ 430.5 million, up from $ 315.4 million in one year. However, it has US $ 947.1 million in cash offsetting this, leading to net cash of US $ 516.6 million.

NasdaqGS: History of debt versus equity of PTCT September 30, 2021

A look at the responsibilities of Therapeutics

According to the latest published balance sheet, Therapeutics had liabilities of US $ 291.0 million due within 12 months and liabilities of US $ 1.57 billion due beyond 12 months. In return, he had $ 947.1 million in cash and $ 78.8 million in receivables due within 12 months. Its liabilities therefore total $ 836.2 million more than the combination of its cash and short-term receivables.

Therapeutics has a market capitalization of US $ 2.62 billion, so it could most likely raise funds to improve its balance sheet, should the need arise. But it is clear that it is absolutely necessary to take a close look at whether it can manage its debt without dilution. Despite its notable liabilities, Therapeutics has a net cash flow, so it’s fair to say that it doesn’t have a lot of debt! The balance sheet is clearly the area you need to focus on when analyzing debt. But it is future profits, more than anything, that will determine Therapeutics’ ability to maintain a healthy balance sheet in the future. So, if you want to see what the professionals think, you might find this free analyst earnings forecast report interesting.

Over the past year, Therapeutics has not been profitable in terms of EBIT, but has managed to increase its revenue by 52%, to US $ 472 million. Hopefully the business will be able to move towards profitability.

So how risky is therapy?

By their very nature, businesses that lose money are riskier than those with a long history of profitability. And we note that Therapeutics recorded a loss of earnings before interest and taxes (EBIT) over the past year. And during the same period, it recorded a negative free cash outflow of US $ 250 million and a book loss of US $ 391 million. While this does make the company a bit risky, it’s important to remember that it has a net cash position of $ 516.6 million. This means that he could continue to spend at his current rate for more than two years. With very solid revenue growth over the past year, Therapeutics could be on the path to profitability. Nonprofits are often risky, but they can also offer great rewards. The balance sheet is clearly the area you need to focus on when analyzing debt. However, not all investment risks lie on the balance sheet – far from it. For example – Therapeutics has 2 warning signs we think you should be aware.

At the end of the day, sometimes it’s easier to focus on businesses that don’t even need to go into debt. Readers can access a list of growth stocks with zero net debt 100% free, at present.

This Simply Wall St article is general in nature. We provide commentary based on historical data and analyst forecasts using only unbiased methodology and our articles are not intended to be financial advice. It does not constitute a recommendation to buy or sell shares and does not take into account your goals or your financial situation. Our aim is to bring you long-term, targeted analysis based on fundamental data. Note that our analysis may not take into account the latest announcements from price sensitive companies or qualitative documents. Simply Wall St has no position in any of the stocks mentioned.

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