David Iben put it well when he said, 'Volatility is not a risk we care about. What we care about is avoiding the 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, Oryzon Genomics S.A. (BME:ORY) does carry debt. But the real question is whether this debt is making the company risky.
Why Does Debt Bring Risk?
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. 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. The first step when considering a company's debt levels is to consider its cash and debt together.
How Much Debt Does Oryzon Genomics Carry?
You can click the graphic below for the historical numbers, but it shows that Oryzon Genomics had €13.2m of debt in September 2019, down from €18.6m, one year before. But on the other hand it also has €39.1m in cash, leading to a €25.9m net cash position.
How Strong Is Oryzon Genomics's Balance Sheet?
The latest balance sheet data shows that Oryzon Genomics had liabilities of €10.5m due within a year, and liabilities of €7.89m falling due after that. On the other hand, it had cash of €39.1m and €1.84m worth of receivables due within a year. So it can boast €22.6m more liquid assets than total liabilities.
This surplus suggests that Oryzon Genomics is using debt in a way that is appears to be both safe and conservative. Given it has easily adequate short term liquidity, we don't think it will have any issues with its lenders. Simply put, the fact that Oryzon Genomics 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 future earnings, more than anything, that will determine Oryzon Genomics's ability to maintain a healthy balance sheet going forward. So if you're focused on the future you can check out this free report showing analyst profit forecasts.
Over 12 months, Oryzon Genomics reported revenue of €9.2m, which is a gain of 63%, although it did not report any earnings before interest and tax. Shareholders probably have their fingers crossed that it can grow its way to profits.
So How Risky Is Oryzon Genomics?
We have no doubt that loss making companies are, in general, riskier than profitable ones. And the fact is that over the last twelve months Oryzon Genomics lost money at the earnings before interest and tax (EBIT) line. Indeed, in that time it burnt through €9.6m of cash and made a loss of €3.5m. But the saving grace is the €25.9m on the balance sheet. That means it could keep spending at its current rate for more than two years. With very solid revenue growth in the last year, Oryzon Genomics may be on a path to profitability. By investing before those profits, shareholders take on more risk in the hope of bigger rewards. For riskier companies like Oryzon Genomics I always like to keep an eye on the long term profit and revenue trends. Fortunately, you can click to see our interactive graph of its profit, revenue, and operating cashflow.
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.
If you spot an error that warrants correction, please contact the editor at email@example.com. This article by Simply Wall St is general in nature. It does not constitute a recommendation to buy or sell any stock, and does not take account of your objectives, or your financial situation. Simply Wall St has no position in the stocks mentioned.
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