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.' It's only natural to consider a company's balance sheet when you examine how risky it is, since debt is often involved when a business collapses. We note that ProMIS Neurosciences, Inc. (TSE:PMN) does have debt on its balance sheet. But the more important question is: how much risk is that debt creating?

When Is Debt Dangerous?

Debt assists a business until the business has trouble paying it off, either with new capital or with free cash flow. In the worst case scenario, a company can go bankrupt if it cannot pay its creditors. 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, 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 ProMIS Neurosciences

What Is ProMIS Neurosciences's Debt?

As you can see below, at the end of September 2021, ProMIS Neurosciences had CA$4.83m of debt, up from none a year ago. Click the image for more detail. But it also has CA$26.6m in cash to offset that, meaning it has CA$21.7m net cash.

How Strong 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$26.6m in cash and CA$212.2k in receivables that were due within 12 months. So it actually has CA$7.19m 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. Succinctly put, ProMIS Neurosciences boasts net cash, so it's fair to say it does not have a heavy debt load! 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 if you're keen to discover more about its earnings, it might be worth checking out this graph of its long term earnings trend.

Given its lack of meaningful operating revenue, ProMIS Neurosciences shareholders no doubt hope it can fund itself until it has a profitable product.

So How Risky Is ProMIS Neurosciences?

By their very nature companies that are losing money are more risky than those with a long history of profitability. 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. Given it only has net cash of CA$21.7m, the company may need to raise more capital if it doesn't reach break-even soon. With very solid revenue growth in the last year, ProMIS Neurosciences may be on a path to profitability. 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. For example ProMIS Neurosciences has 4 warning signs (and 2 which make us uncomfortable) we think you should know about.

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. 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.