Here's Why HLS Therapeutics (TSE:HLS) Can Afford Some Debt

Howard Marks put it nicely when he said that, rather than worrying about share price volatility, 'The possibility of permanent loss is the risk I worry about... and every practical investor I know worries about.' 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. We can see that HLS Therapeutics Inc. (TSE:HLS) does use debt in its business. But the more important question is: how much risk is that debt creating?

Why Does Debt Bring Risk?

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. If things get really bad, the lenders can take control of the business. 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. When we think about a company's use of debt, we first look at cash and debt together.

See our latest analysis for HLS Therapeutics

What Is HLS Therapeutics's Net Debt?

The chart below, which you can click on for greater detail, shows that HLS Therapeutics had US$93.1m in debt in June 2023; about the same as the year before. However, it also had US$20.9m in cash, and so its net debt is US$72.2m.

How Healthy Is HLS Therapeutics' Balance Sheet?

We can see from the most recent balance sheet that HLS Therapeutics had liabilities of US$31.5m falling due within a year, and liabilities of US$83.8m due beyond that. Offsetting this, it had US$20.9m in cash and US$12.1m in receivables that were due within 12 months. So its liabilities total US$82.4m more than the combination of its cash and short-term receivables.

This deficit is considerable relative to its market capitalization of US$114.6m, so it does suggest shareholders should keep an eye on HLS Therapeutics' use of debt. Should its lenders demand that it shore up the balance sheet, shareholders would likely face severe dilution. The balance sheet is clearly the area to focus on when you are analysing debt. But ultimately the future profitability of the business will decide if HLS Therapeutics can strengthen its balance sheet over time. So if you want to see what the professionals think, you might find this free report on analyst profit forecasts to be interesting.

Over 12 months, HLS Therapeutics reported revenue of US$63m, which is a gain of 2.8%, although it did not report any earnings before interest and tax. That rate of growth is a bit slow for our taste, but it takes all types to make a world.

Caveat Emptor

Over the last twelve months HLS Therapeutics produced an earnings before interest and tax (EBIT) loss. Indeed, it lost a very considerable US$13m at the EBIT level. When we look at that and recall the liabilities on its balance sheet, relative to cash, it seems unwise to us for the company to have any debt. So we think its balance sheet is a little strained, though not beyond repair. We would feel better if it turned its trailing twelve month loss of US$26m into a profit. So to be blunt we do think it is risky. There's no doubt that we learn most about debt from the balance sheet. But ultimately, every company can contain risks that exist outside of the balance sheet. Case in point: We've spotted 1 warning sign for HLS Therapeutics you should be aware of.

Of course, if you're the type of investor who prefers buying stocks without the burden of debt, then don't hesitate to discover our exclusive list of net cash growth stocks, today.

Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team (at) simplywallst.com.

This article by Simply Wall St is general in nature. We provide commentary based on historical data and analyst forecasts only using an unbiased methodology and our articles are not intended to be financial advice. 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.