Is PharmaCielo (CVE:PCLO) A Risky Investment?
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.' 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. As with many other companies PharmaCielo Ltd. (CVE:PCLO) makes use of debt. But the real question is whether this debt is making the company risky.
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. Ultimately, if the company can't fulfill its legal obligations to repay debt, shareholders could walk away with nothing. 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 PharmaCielo
What Is PharmaCielo's Debt?
You can click the graphic below for the historical numbers, but it shows that as of March 2021 PharmaCielo had CA$2.92m of debt, an increase on none, over one year. However, its balance sheet shows it holds CA$5.22m in cash, so it actually has CA$2.30m net cash.
A Look At PharmaCielo's Liabilities
According to the last reported balance sheet, PharmaCielo had liabilities of CA$12.1m due within 12 months, and liabilities of CA$4.67m due beyond 12 months. Offsetting this, it had CA$5.22m in cash and CA$1.33m in receivables that were due within 12 months. So its liabilities outweigh the sum of its cash and (near-term) receivables by CA$10.2m.
Since publicly traded PharmaCielo shares are worth a total of CA$180.9m, it seems unlikely that this level of liabilities would be a major threat. However, we do think it is worth keeping an eye on its balance sheet strength, as it may change over time. Despite its noteworthy liabilities, PharmaCielo boasts net cash, so it's fair to say it does not have a heavy debt load! There's no doubt that we learn most about debt from the balance sheet. But ultimately the future profitability of the business will decide if PharmaCielo 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.
Over 12 months, PharmaCielo reported revenue of CA$2.8m, which is a gain of 116%, although it did not report any earnings before interest and tax. So its pretty obvious shareholders are hoping for more growth!
So How Risky Is PharmaCielo?
Statistically speaking companies that lose money are riskier than those that make money. And in the last year PharmaCielo had an earnings before interest and tax (EBIT) loss, truth be told. Indeed, in that time it burnt through CA$27m of cash and made a loss of CA$44m. With only CA$2.30m on the balance sheet, it would appear that its going to need to raise capital again soon. The good news for shareholders is that PharmaCielo has dazzling revenue growth, so there's a very good chance it can boost its free cash flow in the years to come. While unprofitable companies can be risky, they can also grow hard and fast in those pre-profit years. There's no doubt that we learn most about debt from the balance sheet. However, not all investment risk resides within the balance sheet - far from it. For example PharmaCielo has 4 warning signs (and 1 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.
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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