Yahoo Finance Here's Why Kane Biotech (CVE:KNE) Can Afford Some Debt
The external fund manager backed by Berkshire Hathaway's Charlie Munger, Li Lu, makes no bones about it when he says 'The biggest investment risk is not the volatility of prices, but whether you will suffer a permanent loss of capital. 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 Kane Biotech Inc. (CVE:KNE) does have debt on its balance sheet. But is this debt a concern to shareholders?
When Is Debt A Problem?
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 common (but still painful) scenario is that it has to raise new equity capital at a low price, thus permanently diluting shareholders. Of course, debt can be an important tool in businesses, particularly capital heavy businesses. The first step when considering a company's debt levels is to consider its cash and debt together.
View our latest analysis for Kane Biotech
What Is Kane Biotech's Debt?
As you can see below, at the end of June 2019, Kane Biotech had CA$1.39m of debt, up from a year ago. Click the image for more detail. However, it also had CA$1.33m in cash, and so its net debt is CA$62.8k.
A Look At Kane Biotech's Liabilities
According to the last reported balance sheet, Kane Biotech had liabilities of CA$2.37m due within 12 months, and liabilities of CA$447.2k due beyond 12 months. Offsetting these obligations, it had cash of CA$1.33m as well as receivables valued at CA$125.9k due within 12 months. So its liabilities total CA$1.36m more than the combination of its cash and short-term receivables.
Given Kane Biotech has a market capitalization of CA$11.3m, it's hard to believe these liabilities pose much threat. Having said that, it's clear that we should continue to monitor its balance sheet, lest it change for the worse. But either way, Kane Biotech has virtually no net debt, so it's fair to say it does not have a heavy debt load! There's no doubt that we learn most about debt from the balance sheet. But you can't view debt in total isolation; since Kane Biotech will need earnings to service that debt. So when considering debt, it's definitely worth looking at the earnings trend. Click here for an interactive snapshot.
While it hasn't made a profit, at least Kane Biotech booked its first revenue as a publicly listed company, in the last twelve months.
Caveat Emptor
Over the last twelve months Kane Biotech produced an earnings before interest and tax (EBIT) loss. Indeed, it lost a very considerable CA$2.6m at the EBIT level. Considering that alongside the liabilities mentioned above does not give us much confidence that company should be using so much debt. Quite frankly we think the balance sheet is far from match-fit, although it could be improved with time. Another cause for caution is that is bled CA$363k in negative free cash flow over the last twelve months. So to be blunt we think it is risky. For riskier companies like Kane Biotech I always like to keep an eye on whether insiders are buying or selling. So click here if you want to find out for yourself.
At the end of the day, it's often better to focus on companies that are free from net debt. You can access our special list of such companies (all with a track record of profit growth). It's free.
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