Does Knight Therapeutics (TSE:GUD) Have A Healthy Balance Sheet?

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.' So it seems the smart money knows that debt - which is usually involved in bankruptcies - is a very important factor, when you assess how risky a company is. Importantly, Knight Therapeutics Inc. (TSE:GUD) does carry debt. But the more important question is: how much risk is that debt creating?

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, plenty of companies use debt to fund growth, without any negative consequences. When we examine debt levels, we first consider both cash and debt levels, together.

Check out our latest analysis for Knight Therapeutics

What Is Knight Therapeutics's Net Debt?

You can click the graphic below for the historical numbers, but it shows that Knight Therapeutics had CA$38.2m of debt in March 2021, down from CA$58.5m, one year before. But on the other hand it also has CA$411.1m in cash, leading to a CA$372.9m net cash position.

A Look At Knight Therapeutics' Liabilities

The latest balance sheet data shows that Knight Therapeutics had liabilities of CA$135.9m due within a year, and liabilities of CA$35.4m falling due after that. Offsetting this, it had CA$411.1m in cash and CA$81.7m in receivables that were due within 12 months. So it can boast CA$321.5m more liquid assets than total liabilities.

This surplus liquidity suggests that Knight Therapeutics' balance sheet could take a hit just as well as Homer Simpson's head can take a punch. On this view, lenders should feel as safe as the beloved of a black-belt karate master. Simply put, the fact that Knight Therapeutics has more cash than debt is arguably a good indication that it can manage its debt safely. There's no doubt that we learn most about debt from the balance sheet. But it is future earnings, more than anything, that will determine Knight Therapeutics's ability to maintain a healthy balance sheet going forward. So if you're focused on the future you can check out this free report showing analyst profit forecasts.

Over 12 months, Knight Therapeutics reported revenue of CA$200m, which is a gain of 121%, 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 Knight Therapeutics?

Although Knight Therapeutics had an earnings before interest and tax (EBIT) loss over the last twelve months, it made a statutory profit of CA$47m. So taking that on face value, and considering the cash, we don't think its very risky in the near term. Keeping in mind its 121% revenue growth over the last year, we think there's a decent chance the company is on track. We'd see further strong growth as an optimistic indication. For riskier companies like Knight Therapeutics I always like to keep an eye on whether insiders are buying or selling. So click here if you want to find out for yourself.

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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