Is ProMIS Neurosciences (TSE:PMN) A Risky Investment?

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. We can see that ProMIS Neurosciences, Inc. (TSE:PMN) does use debt in its business. But is this debt a concern to shareholders?

What Risk Does Debt Bring?

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 step when considering a company's debt levels is to consider its cash and debt together.

Check out our latest analysis for ProMIS Neurosciences

How Much Debt Does ProMIS Neurosciences Carry?

The image below, which you can click on for greater detail, shows that at September 2021 ProMIS Neurosciences had debt of CA$4.83m, up from none in one year. However, its balance sheet shows it holds CA$26.5m in cash, so it actually has CA$21.7m net cash.

How Healthy Is ProMIS Neurosciences' Balance Sheet?

According to the last reported balance sheet, ProMIS Neurosciences had liabilities of CA$2.19m due within 12 months, and liabilities of CA$17.4m due beyond 12 months. Offsetting this, it had CA$26.5m in cash and CA$212.2k in receivables that were due within 12 months. So it actually has CA$7.16m more liquid assets than total liabilities.

This surplus suggests that ProMIS Neurosciences has a conservative balance sheet, and could probably eliminate its debt without much difficulty. Simply put, the fact that ProMIS Neurosciences has more cash than debt is arguably a good indication that it can manage its debt safely. The balance sheet is clearly the area to focus on when you are analysing debt. But it is ProMIS Neurosciences's earnings that will influence how the balance sheet holds up in the future. So when considering debt, it's definitely worth looking at the earnings trend. Click here for an interactive snapshot.

Since ProMIS Neurosciences doesn't have significant operating revenue, shareholders may be hoping it comes up with a great new product, before it runs out of money.

So How Risky Is ProMIS Neurosciences?

Statistically speaking companies that lose money are riskier than those that make money. And the fact is that over the last twelve months ProMIS Neurosciences lost money at the earnings before interest and tax (EBIT) line. Indeed, in that time it burnt through CA$7.1m of cash and made a loss of CA$9.5m. With only CA$21.7m on the balance sheet, it would appear that its going to need to raise capital again soon. ProMIS Neurosciences's revenue growth shone bright over the last year, so it may well be in a position to turn a profit in due course. By investing before those profits, shareholders take on more risk in the hope of bigger rewards. There's no doubt that we learn most about debt from the balance sheet. However, not all investment risk resides within the balance sheet - far from it. Case in point: We've spotted 5 warning signs for ProMIS Neurosciences you should be aware of, and 2 of them don't sit too well with us.

If you're interested in investing in businesses that can grow profits without the burden of debt, then check out this free list of growing businesses that have net cash on the balance sheet.

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.

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