Is Aequus Pharmaceuticals (CVE:AQS) Using Too Much Debt?

David Iben put it well when he said, 'Volatility is not a risk we care about. What we care about is avoiding the 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 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. If things get really bad, the lenders can take control of the business. 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 Aequus Pharmaceuticals

What Is Aequus Pharmaceuticals's Debt?

As you can see below, at the end of September 2020, Aequus Pharmaceuticals had CA$2.05m of debt, up from CA$1.56m a year ago. Click the image for more detail. But on the other hand it also has CA$2.34m in cash, leading to a CA$285.1k net cash position.

How Healthy Is Aequus Pharmaceuticals's Balance Sheet?

We can see from the most recent balance sheet that Aequus Pharmaceuticals had liabilities of CA$788.6k falling due within a year, and liabilities of CA$2.28m due beyond that. On the other hand, it had cash of CA$2.34m and CA$629.9k worth of receivables due within a year. So its liabilities total CA$101.3k more than the combination of its cash and short-term receivables.

This state of affairs indicates that Aequus Pharmaceuticals's balance sheet looks quite solid, as its total liabilities are just about equal to its liquid assets. So it's very unlikely that the CA$11.2m company is short on cash, but still worth keeping an eye on the balance sheet. Despite its noteworthy liabilities, Aequus Pharmaceuticals 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 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 70%, to CA$2.3m. With any luck the company will be able to grow its way to profitability.

So How Risky Is Aequus Pharmaceuticals?

Statistically speaking companies that lose money are riskier than those that make money. 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$535k and booked a CA$1.9m accounting loss. With only CA$285.1k on the balance sheet, it would appear that its going to need to raise capital again soon. With very solid revenue growth in the last year, Aequus Pharmaceuticals 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. But ultimately, every company can contain risks that exist outside of the balance sheet. Case in point: We've spotted 4 warning signs for Aequus Pharmaceuticals you should be aware of, and 1 of them is significant.

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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