Yahoo Finance Is Hemogenyx Pharmaceuticals (LON:HEMO) Using Debt Sensibly?
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.' So it might be obvious that you need to consider debt, when you think about how risky any given stock is, because too much debt can sink a company. Importantly, Hemogenyx Pharmaceuticals Plc (LON:HEMO) does carry debt. But should shareholders be worried about its use of debt?
Why Does Debt Bring Risk?
Debt is a tool to help businesses grow, but if a business is incapable of paying off its lenders, then it exists at their mercy. Part and parcel of capitalism is the process of 'creative destruction' where failed businesses are mercilessly liquidated by their bankers. However, a more frequent (but still costly) occurrence is where a company must issue shares at bargain-basement prices, permanently diluting shareholders, just to shore up its balance sheet. Of course, plenty of companies use debt to fund growth, without any negative consequences. The first thing to do when considering how much debt a business uses is to look at its cash and debt together.
View our latest analysis for Hemogenyx Pharmaceuticals
What Is Hemogenyx Pharmaceuticals's Net Debt?
As you can see below, Hemogenyx Pharmaceuticals had UK£1.50m of debt at June 2021, down from UK£1.65m a year prior. But it also has UK£10.6m in cash to offset that, meaning it has UK£9.06m net cash.
How Healthy Is Hemogenyx Pharmaceuticals' Balance Sheet?
Zooming in on the latest balance sheet data, we can see that Hemogenyx Pharmaceuticals had liabilities of UK£1.80m due within 12 months and no liabilities due beyond that. Offsetting these obligations, it had cash of UK£10.6m as well as receivables valued at UK£84.7k due within 12 months. So it can boast UK£8.85m more liquid assets than total liabilities.
This luscious liquidity implies that Hemogenyx Pharmaceuticals' balance sheet is sturdy like a giant sequoia tree. On this view, lenders should feel as safe as the beloved of a black-belt karate master. Simply put, the fact that Hemogenyx Pharmaceuticals has more cash than debt is arguably a good indication that it can manage its debt safely. The balance sheet is clearly the area to focus on when you are analysing debt. But it is Hemogenyx Pharmaceuticals's earnings that will influence how the balance sheet holds up in the future. So when considering debt, it's definitely worth looking at the earnings trend. Click here for an interactive snapshot.
Given its lack of meaningful operating revenue, Hemogenyx Pharmaceuticals shareholders no doubt hope it can fund itself until it has a profitable product.
So How Risky Is Hemogenyx Pharmaceuticals?
By their very nature companies that are losing money are more risky than those with a long history of profitability. And the fact is that over the last twelve months Hemogenyx Pharmaceuticals lost money at the earnings before interest and tax (EBIT) line. And over the same period it saw negative free cash outflow of UK£2.3m and booked a UK£4.9m accounting loss. With only UK£9.06m 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. 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 Hemogenyx Pharmaceuticals has 5 warning signs (and 3 which are concerning) we think you should know about.
Of course, if you're the type of investor who prefers buying stocks without the burden of debt, then don't hesitate to discover our exclusive list of net cash growth stocks, today.
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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