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.' 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. As with many other companies Cyclerion Therapeutics, Inc. (NASDAQ:CYCN) makes use of debt. But is this debt a concern to shareholders?
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. Ultimately, if the company can't fulfill its legal obligations to repay debt, shareholders could walk away with nothing. 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. When we think about a company's use of debt, we first look at cash and debt together.
How Much Debt Does Cyclerion Therapeutics Carry?
The image below, which you can click on for greater detail, shows that at June 2020 Cyclerion Therapeutics had debt of US$3.51m, up from none in one year. However, it does have US$56.5m in cash offsetting this, leading to net cash of US$53.0m.
A Look At Cyclerion Therapeutics's Liabilities
Zooming in on the latest balance sheet data, we can see that Cyclerion Therapeutics had liabilities of US$15.6m due within 12 months and liabilities of US$46.3m due beyond that. Offsetting this, it had US$56.5m in cash and US$751.0k in receivables that were due within 12 months. So its liabilities total US$4.72m more than the combination of its cash and short-term receivables.
Since publicly traded Cyclerion Therapeutics shares are worth a total of US$209.3m, it seems unlikely that this level of liabilities would be a major threat. But there are sufficient liabilities that we would certainly recommend shareholders continue to monitor the balance sheet, going forward. Despite its noteworthy liabilities, Cyclerion Therapeutics 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 ultimately the future profitability of the business will decide if Cyclerion Therapeutics can strengthen its balance sheet over time. So if you're focused on the future you can check out this free report showing analyst profit forecasts.
In the last year Cyclerion Therapeutics wasn't profitable at an EBIT level, but managed to grow its revenue by 182%, to US$4.6m. So there's no doubt that shareholders are cheering for growth
So How Risky Is Cyclerion Therapeutics?
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 Cyclerion Therapeutics lost money at the earnings before interest and tax (EBIT) line. Indeed, in that time it burnt through US$92m of cash and made a loss of US$93m. With only US$53.0m on the balance sheet, it would appear that its going to need to raise capital again soon. Importantly, Cyclerion Therapeutics's revenue growth is hot to trot. High growth pre-profit companies may well be risky, but they can also offer great rewards. The balance sheet is clearly the area to focus on when you are analysing debt. However, not all investment risk resides within the balance sheet - far from it. Like risks, for instance. Every company has them, and we've spotted 5 warning signs for Cyclerion Therapeutics (of which 1 is potentially serious!) 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.
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. 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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