Is EastWest Bioscience (CVE:EAST) A Risky Investment?

The external fund manager backed by Berkshire Hathaway's Charlie Munger, Li Lu, makes no bones about it when he says 'The biggest investment risk is not the volatility of prices, but whether you will suffer a permanent loss of capital.' So it might be obvious that you need to consider debt, when you think about how risky any given stock is, because too much debt can sink a company. We can see that EastWest Bioscience Inc. (CVE:EAST) 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. While that is not too common, we often do see indebted companies permanently diluting shareholders because lenders force them to raise capital at a distressed price. 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.

Check out our latest analysis for EastWest Bioscience

How Much Debt Does EastWest Bioscience Carry?

The chart below, which you can click on for greater detail, shows that EastWest Bioscience had CA$2.46m in debt in April 2022; about the same as the year before. And it doesn't have much cash, so its net debt is about the same.

A Look At EastWest Bioscience's Liabilities

The latest balance sheet data shows that EastWest Bioscience had liabilities of CA$3.77m due within a year, and liabilities of CA$422.3k falling due after that. Offsetting this, it had CA$20.0k in cash and CA$81.3k in receivables that were due within 12 months. So it has liabilities totalling CA$4.09m more than its cash and near-term receivables, combined.

When you consider that this deficiency exceeds the company's CA$3.52m market capitalization, you might well be inclined to review the balance sheet intently. Hypothetically, extremely heavy dilution would be required if the company were forced to pay down its liabilities by raising capital at the current share price. When analysing debt levels, the balance sheet is the obvious place to start. But it is EastWest Bioscience'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.

It seems likely shareholders hope that EastWest Bioscience can significantly advance the business plan before too long, because it doesn't have any significant revenue at the moment.

Caveat Emptor

While EastWest Bioscience's falling revenue is about as heartwarming as a wet blanket, arguably its earnings before interest and tax (EBIT) loss is even less appealing. Its EBIT loss was a whopping CA$2.4m. Considering that alongside the liabilities mentioned above make us nervous about the company. We'd want to see some strong near-term improvements before getting too interested in the stock. Not least because it burned through CA$475k in negative free cash flow over the last year. That means it's on the risky side of things. 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. Be aware that EastWest Bioscience is showing 6 warning signs in our investment analysis , and 4 of those can't be ignored...

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.