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 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 note that Tetra Bio-Pharma Inc. (TSE:TBP) does have debt on its balance sheet. But the real question is whether this debt is making the company risky.
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. In the worst case scenario, a company can go bankrupt if it cannot pay its creditors. 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, debt can be an important tool in businesses, particularly capital heavy businesses. When we think about a company's use of debt, we first look at cash and debt together.
What Is Tetra Bio-Pharma's Debt?
You can click the graphic below for the historical numbers, but it shows that as of May 2021 Tetra Bio-Pharma had CA$3.00m of debt, an increase on none, over one year. However, it does have CA$16.2m in cash offsetting this, leading to net cash of CA$13.2m.
A Look At Tetra Bio-Pharma's Liabilities
We can see from the most recent balance sheet that Tetra Bio-Pharma had liabilities of CA$5.22m falling due within a year, and liabilities of CA$3.00m due beyond that. Offsetting these obligations, it had cash of CA$16.2m as well as receivables valued at CA$536.0k due within 12 months. So it can boast CA$8.55m more liquid assets than total liabilities.
This surplus suggests that Tetra Bio-Pharma has a conservative balance sheet, and could probably eliminate its debt without much difficulty. Succinctly put, Tetra Bio-Pharma boasts net cash, so it's fair to say it does not have a heavy debt load! When analysing debt levels, the balance sheet is the obvious place to start. But it is Tetra Bio-Pharma'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.
Given it has no significant operating revenue at the moment, shareholders will be hoping Tetra Bio-Pharma can make progress and gain better traction for the business, before it runs low on cash.
So How Risky Is Tetra Bio-Pharma?
Statistically speaking companies that lose money are riskier than those that make money. And we do note that Tetra Bio-Pharma had an earnings before interest and tax (EBIT) loss, over the last year. And over the same period it saw negative free cash outflow of CA$29m and booked a CA$28m accounting loss. With only CA$13.2m on the balance sheet, it would appear that its going to need to raise capital again soon. Overall, its balance sheet doesn't seem overly risky, at the moment, but we're always cautious until we see the positive free cash flow. 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. Case in point: We've spotted 6 warning signs for Tetra Bio-Pharma you should be aware of, and 3 of them make us uncomfortable.
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.
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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.
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