Is PharmaCielo (CVE:PCLO) A Risky Investment?

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.' 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. Importantly, PharmaCielo Ltd. (CVE:PCLO) does carry debt. But should shareholders be worried about its use of debt?

Why Does Debt Bring Risk?

Debt is a tool to help businesses grow, but if a business is incapable of paying off its lenders, then it exists at their mercy. Ultimately, if the company can't fulfill its legal obligations to repay debt, shareholders could walk away with nothing. 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. 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 step when considering a company's debt levels is to consider its cash and debt together.

View our latest analysis for PharmaCielo

What Is PharmaCielo's Debt?

As you can see below, at the end of December 2020, PharmaCielo had CA$3.15m of debt, up from none a year ago. Click the image for more detail. But on the other hand it also has CA$9.61m in cash, leading to a CA$6.46m net cash position.

A Look At PharmaCielo's Liabilities

The latest balance sheet data shows that PharmaCielo had liabilities of CA$12.1m due within a year, and liabilities of CA$5.72m falling due after that. On the other hand, it had cash of CA$9.61m and CA$924.1k worth of receivables due within a year. So its liabilities outweigh the sum of its cash and (near-term) receivables by CA$7.24m.

Of course, PharmaCielo has a market capitalization of CA$214.2m, so these liabilities are probably manageable. But there are sufficient liabilities that we would certainly recommend shareholders continue to monitor the balance sheet, going forward. While it does have liabilities worth noting, PharmaCielo also has more cash than debt, so we're pretty confident it can manage its debt safely. There's no doubt that we learn most about debt from the balance sheet. But ultimately the future profitability of the business will decide if PharmaCielo can strengthen its balance sheet over time. So if you want to see what the professionals think, you might find this free report on analyst profit forecasts to be interesting.

Over 12 months, PharmaCielo reported revenue of CA$2.7m, which is a gain of 235%, although it did not report any earnings before interest and tax. That's virtually the hole-in-one of revenue growth!

So How Risky Is PharmaCielo?

By their very nature companies that are losing money are more risky than those with a long history of profitability. And we do note that PharmaCielo 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$28m and booked a CA$44m accounting loss. Given it only has net cash of CA$6.46m, the company may need to raise more capital if it doesn't reach break-even soon. Importantly, PharmaCielo's revenue growth is hot to trot. While unprofitable companies can be risky, they can also grow hard and fast in those pre-profit years. 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. We've identified 5 warning signs with PharmaCielo (at least 2 which don't sit too well with us) , 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.

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This article by Simply Wall St is general in nature. 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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