What's going on?

Valeant, the pharmaceutical company that is a former darling of investors, saw its stock pop more than 25% on Tuesday after reporting its most recent financial results!

What does this mean?

After flagging sales and an accounting scandal contributed to a huge decline in its stock price, Valeant hired a respected new CEO about a year ago to try to turn things around. Unfortunately, the stock continued to decline after the new management decreased its predictions for near-term profits. It also looked like the company was struggling to sell some of its businesses, the proceeds from which it was planning to use to pay off some of its huge debt. However, the company had some good news for investors on Tuesday: it increased its forecast for profit this year and also said that it had made progress in reducing its debt.

Why should I care?

The bigger picture: It�s extremely difficult to value a stock when a company has a lot of debt. (tweet this)

If a company cannot pay back its debt, then its lenders usually take it over. Therefore, if a company is teetering on the edge of bankruptcy, as some investors feel has been the case with Valeant, then the shares go down � a lot! However, if the company manages to get its debt under control, then those owning the stock still own the rights to all of the company�s future profits, which offers them a potentially big return. In short, companies in Valeant�s position are a very risky investment proposition.


For markets: It�s encouraging news for Valeant, but it might not be enough.

Valeant now appears to be making some progress on reducing its debt. But major questions persist, including the huge amount of debt it still has left � and whether the businesses that it doesn�t sell are good enough to drive future profits.