Yahoo Finance Is Khiron Life Sciences (CVE:KHRN) Weighed On By Its Debt Load?
Legendary fund manager Li Lu (who Charlie Munger backed) once said, 'The biggest investment risk is not the volatility of prices, but whether you will suffer a permanent loss of capital.' It's only natural to consider a company's balance sheet when you examine how risky it is, since debt is often involved when a business collapses. We note that Khiron Life Sciences Corp. (CVE:KHRN) does have debt on its balance sheet. But should shareholders be worried about its use of debt?
When Is Debt A Problem?
Generally speaking, debt only becomes a real problem when a company can't easily pay it off, either by raising capital or with its own cash flow. Part and parcel of capitalism is the process of 'creative destruction' where failed businesses are mercilessly liquidated by their bankers. While that is not too common, we often do see indebted companies permanently diluting shareholders because lenders force them to raise capital at a distressed price. By replacing dilution, though, debt can be an extremely good tool for businesses that need capital to invest in growth at high rates of return. When we examine debt levels, we first consider both cash and debt levels, together.
See our latest analysis for Khiron Life Sciences
What Is Khiron Life Sciences's Net Debt?
As you can see below, at the end of June 2022, Khiron Life Sciences had CA$2.34m of debt, up from CA$345.0k a year ago. Click the image for more detail. But it also has CA$5.13m in cash to offset that, meaning it has CA$2.78m net cash.
A Look At Khiron Life Sciences' Liabilities
Zooming in on the latest balance sheet data, we can see that Khiron Life Sciences had liabilities of CA$7.62m due within 12 months and liabilities of CA$2.74m due beyond that. Offsetting these obligations, it had cash of CA$5.13m as well as receivables valued at CA$4.40m due within 12 months. So its liabilities total CA$839.0k more than the combination of its cash and short-term receivables.
Given Khiron Life Sciences has a market capitalization of CA$28.1m, 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. Despite its noteworthy liabilities, Khiron Life Sciences boasts net cash, so it's fair to say it does not have a heavy debt load! 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 Khiron Life Sciences can strengthen its balance sheet over time. So if you want to see what the professionals think, you might find this free report on analyst profit forecasts to be interesting.
While it hasn't made a profit, at least Khiron Life Sciences booked its first revenue as a publicly listed company, in the last twelve months.
So How Risky Is Khiron Life Sciences?
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 Khiron Life Sciences 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 CA$84k and booked a CA$33m accounting loss. With only CA$2.78m on the balance sheet, it would appear that its going to need to raise capital again soon. Khiron Life Sciences's revenue growth shone bright over the last year, so it may well be in a position to turn a profit in due course. Pre-profit companies are often risky, but they can also offer great rewards. The balance sheet is clearly the area to focus on when you are analysing debt. But ultimately, every company can contain risks that exist outside of the balance sheet. For example Khiron Life Sciences has 4 warning signs (and 2 which can't be ignored) we think you should know about.
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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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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