HLS Therapeutics (TSE:HLS) Is Carrying A Fair Bit Of Debt

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. 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. We note that HLS Therapeutics Inc. (TSE:HLS) does have debt on its balance sheet. But is this debt a concern to shareholders?

When Is Debt Dangerous?

Debt assists a business until the business has trouble paying it off, either with new capital or with free cash flow. Part and parcel of capitalism is the process of 'creative destruction' where failed businesses are mercilessly liquidated by their bankers. However, a more frequent (but still costly) occurrence is where a company must issue shares at bargain-basement prices, permanently diluting shareholders, just to shore up its balance sheet. 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 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 HLS Therapeutics

What Is HLS Therapeutics's Debt?

You can click the graphic below for the historical numbers, but it shows that HLS Therapeutics had US$94.4m of debt in December 2019, down from US$99.0m, one year before. However, it also had US$47.1m in cash, and so its net debt is US$47.3m.

A Look At HLS Therapeutics's Liabilities

We can see from the most recent balance sheet that HLS Therapeutics had liabilities of US$47.1m falling due within a year, and liabilities of US$94.3m due beyond that. Offsetting these obligations, it had cash of US$47.1m as well as receivables valued at US$11.9m due within 12 months. So its liabilities total US$82.5m more than the combination of its cash and short-term receivables.

While this might seem like a lot, it is not so bad since HLS Therapeutics has a market capitalization of US$408.0m, and so it could probably strengthen its balance sheet by raising capital if it needed to. However, it is still worthwhile taking a close look at its ability to pay off debt. 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 HLS Therapeutics's ability to maintain a healthy balance sheet going forward. So if you want to see what the professionals think, you might find this free report on analyst profit forecasts to be interesting.

In the last year HLS Therapeutics had negative earnings before interest and tax, and actually shrunk its revenue by 12%, to US$54m. That's not what we would hope to see.

Caveat Emptor

While HLS Therapeutics's falling revenue is about as heartwarming as a wet blanket, arguably its earnings before interest and tax (EBIT) loss is even less appealing. Indeed, it lost US$4.6m at the EBIT level. Considering that alongside the liabilities mentioned above does not give us much confidence that company should be using so much debt. Quite frankly we think the balance sheet is far from match-fit, although it could be improved with time. We would feel better if it turned its trailing twelve month loss of US$20m into a profit. So to be blunt we do think it is risky. 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. To that end, you should be aware of the 3 warning signs we've spotted with HLS Therapeutics .

If, after all that, you're more interested in a fast growing company with a rock-solid balance sheet, then check out our list of net cash growth stocks without delay.

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