Would HLS Therapeutics (TSE:HLS) Be Better Off With Less Debt?

David Iben put it well when he said, 'Volatility is not a risk we care about. What we care about is avoiding the 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, HLS Therapeutics Inc. (TSE:HLS) does carry debt. But should shareholders be worried about its use of debt?

When Is Debt Dangerous?

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. By replacing dilution, though, debt can be an extremely good tool for businesses that need capital to invest in growth at high rates of return. The first step when considering a company's debt levels is to consider its cash and debt together.

Check out our latest analysis for HLS Therapeutics

What Is HLS Therapeutics's Net Debt?

As you can see below, HLS Therapeutics had US$96.3m of debt, at December 2022, which is about the same as the year before. You can click the chart for greater detail. However, it does have US$20.7m in cash offsetting this, leading to net debt of about US$75.6m.

How Strong Is HLS Therapeutics' Balance Sheet?

We can see from the most recent balance sheet that HLS Therapeutics had liabilities of US$31.2m falling due within a year, and liabilities of US$85.1m due beyond that. On the other hand, it had cash of US$20.7m and US$11.2m worth of receivables due within a year. So it has liabilities totalling US$84.4m more than its cash and near-term receivables, combined.

This is a mountain of leverage relative to its market capitalization of US$124.3m. This suggests shareholders would be heavily diluted if the company needed to shore up its balance sheet in a hurry. When analysing debt levels, the balance sheet is the obvious place to start. 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$61m, which is a gain of 2.4%, 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. For example, we would not want to see a repeat of last year's loss of US$24m. So in short it's a really risky stock. 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. Be aware that HLS Therapeutics is showing 1 warning sign in our investment analysis , you should know about...

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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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.