Legendary fund manager Li Lu (whom Charlie Munger once backed) once said, “The greatest risk in investing is not price volatility, but whether you will suffer a permanent loss of capital. So it may be obvious that you need to take debt into account when thinking about the risk of a given stock, because too much debt can sink a business. We notice that ProPhase Laboratories, Inc. (NASDAQ:PRPH) has debt on its balance sheet. But the real question is whether this debt makes the business risky.

When is debt dangerous?

Debt helps a business until the business struggles to pay it back, either with new capital or with free cash flow. An integral part of capitalism is the process of “creative destruction” where bankrupt companies are mercilessly liquidated by their bankers. However, a more common (but still costly) situation is when a company has to dilute shareholders at a cheap share price just to keep debt under control. By replacing dilution, however, debt can be a great tool for companies that need capital to invest in growth at high rates of return. When we think about a company’s use of debt, we first look at cash and debt together.

How much debt does ProPhase Labs have?

As you can see below, ProPhase Labs had $10.1 million in debt as of September 2021, roughly the same as the previous year. You can click on the graph for more details. However, his balance sheet shows that he holds $22.9 million in cash, so he actually has net cash of $12.8 million.

A look at the responsibilities of ProPhase Labs

We can see from the most recent balance sheet that ProPhase Labs had liabilities of US$9.93 million falling due within one year, and liabilities of US$14.4 million due beyond. On the other hand, it had liquidities of 22.9 million dollars and 10.7 million dollars of receivables at less than one year. So he actually has US$9.18 million Following liquid assets than total liabilities.

This surplus suggests that ProPhase Labs has a conservative balance sheet, and could probably eliminate its debt without too much difficulty. Simply put, the fact that ProPhase Labs has more cash than debt is arguably a good indication that it can safely manage its debt. There is no doubt that we learn the most about debt from the balance sheet. But it is future earnings, more than anything, that will determine ProPhase Labs’ ability to maintain a healthy balance sheet in the future. So if you are focused on the future, you can check out this free report showing analyst earnings forecast.

Year-over-year, ProPhase Labs reported revenue of $39 million, a 213% gain, although it reported no earnings before interest and taxes. That’s practically the hole-in-one of revenue growth!

So how risky is ProPhase Labs?

Statistically speaking, businesses that lose money are riskier than those that make money. And over the past year, ProPhase Labs has had a loss in earnings before interest and taxes (EBIT), if truth be told. And during the same period, it recorded a negative free cash outflow of US$21 million and recorded a book loss of US$5.3 million. Given that it only has $12.8 million in net cash, the company may need to raise more capital if it doesn’t break even soon. Importantly, ProPhase Labs revenue growth is imminent. While unprofitable businesses can be risky, they can also grow strongly and quickly in those pre-profit years. The balance sheet is clearly the area to focus on when analyzing debt. However, not all investment risks reside on the balance sheet, far from it. For example, we found 3 warning signs for ProPhase Labs (1 is a bit worrying!) that you should be aware of before investing here.

In the end, sometimes it’s easier to focus on companies that don’t even need to take on debt. Readers can access a list of growth stocks with no net debt 100% freeat present.

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