Some say volatility, rather than debt, is the best way to think about risk as an investor, but Warren Buffett famously said that 'Volatility is far from synonymous with risk.' It's only natural to consider a company's balance sheet when you examine how risky it is, since debt is often involved when a business collapses. As with many other companies Velan Inc. (TSE:VLN) makes use of debt. But the more important question is: how much risk is that debt creating?
What Risk Does Debt Bring?
Debt and other liabilities become risky for a business when it cannot easily fulfill those obligations, either with free cash flow or by raising capital at an attractive price. Ultimately, if the company can't fulfill its legal obligations to repay debt, shareholders could walk away with nothing. 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, debt can be an important tool in businesses, particularly capital heavy businesses. When we examine debt levels, we first consider both cash and debt levels, together.
How Much Debt Does Velan Carry?
You can click the graphic below for the historical numbers, but it shows that as of May 2019 Velan had US$55.3m of debt, an increase on US$48.6m, over one year. However, it does have US$76.9m in cash offsetting this, leading to net cash of US$21.5m.
How Healthy Is Velan's Balance Sheet?
The latest balance sheet data shows that Velan had liabilities of US$191.2m due within a year, and liabilities of US$38.8m falling due after that. Offsetting these obligations, it had cash of US$76.9m as well as receivables valued at US$142.9m due within 12 months. So it has liabilities totalling US$10.3m more than its cash and near-term receivables, combined.
Since publicly traded Velan shares are worth a total of US$112.2m, it seems unlikely that this level of liabilities would be a major threat. Having said that, it's clear that we should continue to monitor its balance sheet, lest it change for the worse. While it does have liabilities worth noting, Velan also has more cash than debt, so we're pretty confident it can manage its debt safely. There's no doubt that we learn most about debt from the balance sheet. 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.
In the last year Velan managed to grow its revenue by 8.1%, to US$373m. We usually like to see faster growth from unprofitable companies, but each to their own.
So How Risky Is Velan?
Statistically speaking companies that lose money are riskier than those that make money. And the fact is that over the last twelve months Velan lost money at the earnings before interest and tax (EBIT) line. And over the same period it saw negative free cash outflow of US$8.8m and booked a US$7.0m accounting loss. But the saving grace is the US$77m on the balance sheet. That means it could keep spending at its current rate for more than five years. Summing up, we're a little skeptical of this one, as it seems fairly risky in the absence of free cashflow. When I consider a company to be a bit risky, I think it is responsible to check out whether insiders have been reporting any share sales. Luckily, you can click here ito see our graphic depicting Velan insider transactions.
When all is said and done, sometimes its easier to focus on companies that don't even need debt. Readers can access a list of growth stocks with zero net debt 100% free, right now.
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