Yahoo Finance Velan (TSE:VLN) Has Debt But No Earnings; Should You Worry?
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.' 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 can see that Velan Inc. (TSE:VLN) does use debt in its business. 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 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 thing to do when considering how much debt a business uses is to look at its cash and debt together.
Check out our latest analysis for Velan
What Is Velan's Net Debt?
You can click the graphic below for the historical numbers, but it shows that as of May 2021 Velan had US$74.0m of debt, an increase on US$58.6m, over one year. However, it does have US$92.1m in cash offsetting this, leading to net cash of US$18.1m.
How Strong Is Velan's Balance Sheet?
According to the last reported balance sheet, Velan had liabilities of US$228.5m due within 12 months, and liabilities of US$80.5m due beyond 12 months. Offsetting these obligations, it had cash of US$92.1m as well as receivables valued at US$125.6m due within 12 months. So it has liabilities totalling US$91.3m more than its cash and near-term receivables, combined.
This is a mountain of leverage relative to its market capitalization of US$149.8m. This suggests shareholders would be heavily diluted if the company needed to shore up its balance sheet in a hurry. Despite its noteworthy liabilities, Velan boasts net cash, so it's fair to say it does not have a heavy debt load! When analysing debt levels, the balance sheet is the obvious place to start. But it is Velan'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.
Over 12 months, Velan made a loss at the EBIT level, and saw its revenue drop to US$300m, which is a fall of 18%. We would much prefer see growth.
So How Risky Is Velan?
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 Velan lost money at the earnings before interest and tax (EBIT) line. Indeed, in that time it burnt through US$38m of cash and made a loss of US$320k. But the saving grace is the US$18.1m on the balance sheet. That means it could keep spending at its current rate for more than two years. Summing up, we're a little skeptical of this one, as it seems fairly risky in the absence of free cashflow. 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. For example Velan has 2 warning signs (and 1 which can't be ignored) we think you should know about.
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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