Yahoo Finance Is Aequus Pharmaceuticals (CVE:AQS) Weighed On By Its Debt Load?
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.' 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. As with many other companies Aequus Pharmaceuticals Inc. (CVE:AQS) makes use of debt. But the real question is whether this debt is making the company risky.
When Is Debt Dangerous?
Debt and other liabilities become risky for a business when it cannot easily fulfill those obligations, either with free cash flow or by raising capital at an attractive price. If things get really bad, the lenders can take control of the business. 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, 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. When we examine debt levels, we first consider both cash and debt levels, together.
Check out our latest analysis for Aequus Pharmaceuticals
What Is Aequus Pharmaceuticals's Net Debt?
The image below, which you can click on for greater detail, shows that Aequus Pharmaceuticals had debt of CA$1.89m at the end of September 2021, a reduction from CA$2.05m over a year. But on the other hand it also has CA$2.89m in cash, leading to a CA$991.6k net cash position.
How Healthy Is Aequus Pharmaceuticals' Balance Sheet?
Zooming in on the latest balance sheet data, we can see that Aequus Pharmaceuticals had liabilities of CA$2.39m due within 12 months and liabilities of CA$133.2k due beyond that. On the other hand, it had cash of CA$2.89m and CA$671.5k worth of receivables due within a year. So it can boast CA$1.04m more liquid assets than total liabilities.
This surplus suggests that Aequus Pharmaceuticals has a conservative balance sheet, and could probably eliminate its debt without much difficulty. Simply put, the fact that Aequus Pharmaceuticals has more cash than debt is arguably a good indication that it can manage its debt safely. When analysing debt levels, the balance sheet is the obvious place to start. But it is Aequus Pharmaceuticals's earnings that will influence how the balance sheet holds up in the future. So if you're keen to discover more about its earnings, it might be worth checking out this graph of its long term earnings trend.
In the last year Aequus Pharmaceuticals wasn't profitable at an EBIT level, but managed to grow its revenue by 19%, to CA$2.7m. We usually like to see faster growth from unprofitable companies, but each to their own.
So How Risky Is Aequus Pharmaceuticals?
We have no doubt that loss making companies are, in general, riskier than profitable ones. And we do note that Aequus Pharmaceuticals had an earnings before interest and tax (EBIT) loss, over the last year. Indeed, in that time it burnt through CA$1.4m of cash and made a loss of CA$1.6m. With only CA$991.6k on the balance sheet, it would appear that its going to need to raise capital again soon. 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. There's no doubt that we learn most about debt from the balance sheet. But ultimately, every company can contain risks that exist outside of the balance sheet. Case in point: We've spotted 3 warning signs for Aequus Pharmaceuticals you should be aware of.
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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