Knight Therapeutics (TSE:GUD) May Not Be Profitable But It Seems To Be Managing Its Debt Just Fine, Anyway

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.' 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. We note that Knight Therapeutics Inc. (TSE:GUD) does have debt on its balance sheet. But the real question is whether this debt is making the company risky.

What Risk Does Debt Bring?

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. If things get really bad, the lenders can take control of the business. 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.

View our latest analysis for Knight Therapeutics

How Much Debt Does Knight Therapeutics Carry?

The image below, which you can click on for greater detail, shows that at September 2020 Knight Therapeutics had debt of CA$43.4m, up from none in one year. But on the other hand it also has CA$391.1m in cash, leading to a CA$347.7m net cash position.

How Healthy Is Knight Therapeutics' Balance Sheet?

Zooming in on the latest balance sheet data, we can see that Knight Therapeutics had liabilities of CA$99.0m due within 12 months and liabilities of CA$32.7m due beyond that. Offsetting these obligations, it had cash of CA$391.1m as well as receivables valued at CA$82.1m due within 12 months. So it can boast CA$341.5m more liquid assets than total liabilities.

This excess liquidity is a great indication that Knight Therapeutics' balance sheet is almost as strong as Fort Knox. With this in mind one could posit that its balance sheet means the company is able to handle some adversity. Succinctly put, Knight Therapeutics 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 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 want to see what the professionals think, you might find this free report on analyst profit forecasts to be interesting.

In the last year Knight Therapeutics wasn't profitable at an EBIT level, but managed to grow its revenue by 1,158%, to CA$182m. That's virtually the hole-in-one of revenue 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$27m. 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 1,158% revenue growth over the last year, we think there's a decent chance the company is on track. There's no doubt fast top line growth can cure all manner of ills, for a stock. When analysing debt levels, the balance sheet is the obvious place to start. But ultimately, every company can contain risks that exist outside of the balance sheet. For example, we've discovered 2 warning signs for Knight Therapeutics (1 is a bit concerning!) that you should be aware of before investing here.

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.

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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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