Warren Buffett famously said, 'Volatility is far from synonymous with risk.' When we think about how risky a company is, we always like to look at its use of debt, since debt overload can lead to ruin. We note that Kadmon Holdings, Inc. (NYSE:KDMN) does have debt on its balance sheet. But is this debt a concern to shareholders?
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. 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, debt can be an important tool in businesses, particularly capital heavy businesses. When we think about a company's use of debt, we first look at cash and debt together.
What Is Kadmon Holdings's Debt?
You can click the graphic below for the historical numbers, but it shows that Kadmon Holdings had US$3.06m of debt in June 2020, down from US$27.7m, one year before. However, its balance sheet shows it holds US$182.3m in cash, so it actually has US$179.2m net cash.
How Healthy Is Kadmon Holdings's Balance Sheet?
The latest balance sheet data shows that Kadmon Holdings had liabilities of US$30.1m due within a year, and liabilities of US$19.8m falling due after that. On the other hand, it had cash of US$182.3m and US$396.0k worth of receivables due within a year. So it can boast US$132.7m more liquid assets than total liabilities.
It's good to see that Kadmon Holdings has plenty of liquidity on its balance sheet, suggesting conservative management of liabilities. Due to its strong net asset position, it is not likely to face issues with its lenders. Simply put, the fact that Kadmon Holdings 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 Kadmon Holdings 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 Kadmon Holdings wasn't profitable at an EBIT level, but managed to grow its revenue by 1,439%, to US$12m. That's virtually the hole-in-one of revenue growth!
So How Risky Is Kadmon Holdings?
By their very nature companies that are losing money are more risky than those with a long history of profitability. And we do note that Kadmon Holdings had an earnings before interest and tax (EBIT) loss, over the last year. And over the same period it saw negative free cash outflow of US$74m and booked a US$133m accounting loss. But at least it has US$179.2m on the balance sheet to spend on growth, near-term. The good news for shareholders is that Kadmon Holdings has dazzling revenue growth, so there's a very good chance it can boost its free cash flow in the years to come. High growth pre-profit companies may well be risky, but they can also offer great rewards. When analysing debt levels, the balance sheet is the obvious place to start. However, not all investment risk resides within the balance sheet - far from it. Case in point: We've spotted 3 warning signs for Kadmon Holdings you should be aware of.
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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