Is Aequus Pharmaceuticals (CVE:AQS) Using Debt Sensibly?

Warren Buffett famously said, 'Volatility is far from synonymous with risk.' When we think about how risky a company is, we always like to look at its use of debt, since debt overload can lead to ruin. We can see that Aequus Pharmaceuticals Inc. (CVE:AQS) 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. 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. 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 thing to do when considering how much debt a business uses is to look at its cash and debt together.

Check out our latest analysis for Aequus Pharmaceuticals

How Much Debt Does Aequus Pharmaceuticals Carry?

As you can see below, Aequus Pharmaceuticals had CA$1.89m of debt at September 2021, down from CA$2.05m a year prior. But on the other hand it also has CA$2.89m in cash, leading to a CA$991.6k net cash position.

How Strong Is Aequus Pharmaceuticals' Balance Sheet?

According to the last reported balance sheet, Aequus Pharmaceuticals had liabilities of CA$2.39m due within 12 months, and liabilities of CA$133.2k due beyond 12 months. On the other hand, it had cash of CA$2.89m and CA$671.5k worth of receivables due within a year. So it can boast CA$1.04m more liquid assets than total liabilities.

This surplus suggests that Aequus Pharmaceuticals has a conservative balance sheet, and could probably eliminate its debt without much difficulty. 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 you can't view debt in total isolation; since Aequus Pharmaceuticals will need earnings to service that debt. So when considering debt, it's definitely worth looking at the earnings trend. Click here for an interactive snapshot.

Over 12 months, Aequus Pharmaceuticals reported revenue of CA$2.7m, which is a gain of 19%, although it did not report any earnings before interest and tax. We usually like to see faster growth from unprofitable companies, but each to their own.

So How Risky Is Aequus Pharmaceuticals?

We have no doubt that loss making companies are, in general, riskier than profitable ones. And in the last year Aequus Pharmaceuticals had an earnings before interest and tax (EBIT) loss, truth be told. Indeed, in that time it burnt through CA$1.4m of cash and made a loss of CA$1.6m. Given it only has net cash of CA$991.6k, the company may need to raise more capital if it doesn't reach break-even 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. When analysing debt levels, the balance sheet is the obvious place to start. However, not all investment risk resides within the balance sheet - far from it. We've identified 3 warning signs with Aequus Pharmaceuticals , and understanding them should be part of your investment process.

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.

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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