Health Check: How Prudently Does Aequus Pharmaceuticals (CVE:AQS) Use Debt?

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.' 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 Aequus Pharmaceuticals Inc. (CVE:AQS) does have debt on its balance sheet. But should shareholders be worried about its use of debt?

What Risk Does Debt Bring?

Debt and other liabilities become risky for a business when it cannot easily fulfill those obligations, either with free cash flow or by raising capital at an attractive price. Ultimately, if the company can't fulfill its legal obligations to repay debt, shareholders could walk away with nothing. 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. Of course, plenty of companies use debt to fund growth, without any negative consequences. The first step when considering a company's debt levels is to consider its cash and debt together.

Check out our latest analysis for Aequus Pharmaceuticals

What Is Aequus Pharmaceuticals's Debt?

You can click the graphic below for the historical numbers, but it shows that Aequus Pharmaceuticals had CA$1.89m of debt in September 2021, down from CA$2.05m, one year before. However, its balance sheet shows it holds CA$2.89m in cash, so it actually has CA$991.6k net cash.

How Strong Is Aequus Pharmaceuticals' Balance Sheet?

The latest balance sheet data shows that Aequus Pharmaceuticals had liabilities of CA$2.39m due within a year, and liabilities of CA$133.2k falling due after that. Offsetting this, it had CA$2.89m in cash and CA$671.5k in receivables that were due within 12 months. So it can boast CA$1.04m more liquid assets than total liabilities.

This short term liquidity is a sign that Aequus Pharmaceuticals could probably pay off its debt with ease, as its balance sheet is far from stretched. Succinctly put, Aequus Pharmaceuticals boasts net cash, so it's fair to say it does not have a heavy debt load! There's no doubt that we learn most about debt from the balance sheet. But it is Aequus Pharmaceuticals'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.

In the last year Aequus Pharmaceuticals wasn't profitable at an EBIT level, but managed to grow its revenue by 19%, to CA$2.7m. That rate of growth is a bit slow for our taste, but it takes all types to make a world.

So How Risky Is Aequus Pharmaceuticals?

By their very nature companies that are losing money are more risky than those with a long history of profitability. And in the last year Aequus Pharmaceuticals had an earnings before interest and tax (EBIT) loss, truth be told. And over the same period it saw negative free cash outflow of CA$1.4m and booked a CA$1.6m accounting loss. With only CA$991.6k 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. But ultimately, every company can contain risks that exist outside of the balance sheet. These risks can be hard to spot. Every company has them, and we've spotted 4 warning signs for Aequus Pharmaceuticals (of which 1 shouldn't be ignored!) you should know about.

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.

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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.