Is PharmaCielo (CVE:PCLO) Using Too Much Debt?

Howard Marks put it nicely when he said that, rather than worrying about share price volatility, 'The possibility of permanent loss is the risk I worry about... and every practical investor I know worries about.' 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. As with many other companies PharmaCielo Ltd. (CVE:PCLO) makes use of debt. But the real question is whether this debt is making the company risky.

What Risk Does Debt Bring?

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. If things get really bad, the lenders can take control of the business. 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.

Check out our latest analysis for PharmaCielo

What Is PharmaCielo's Debt?

You can click the graphic below for the historical numbers, but it shows that as of September 2022 PharmaCielo had CA$11.2m of debt, an increase on CA$2.87m, over one year. On the flip side, it has CA$532.8k in cash leading to net debt of about CA$10.7m.

How Healthy Is PharmaCielo's Balance Sheet?

According to the last reported balance sheet, PharmaCielo had liabilities of CA$7.31m due within 12 months, and liabilities of CA$10.6m due beyond 12 months. Offsetting these obligations, it had cash of CA$532.8k as well as receivables valued at CA$134.9k due within 12 months. So it has liabilities totalling CA$17.3m more than its cash and near-term receivables, combined.

While this might seem like a lot, it is not so bad since PharmaCielo has a market capitalization of CA$36.4m, and so it could probably strengthen its balance sheet by raising capital if it needed to. However, it is still worthwhile taking a close look at its ability to pay off debt. There's no doubt that we learn most about debt from the balance sheet. But it is PharmaCielo'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 PharmaCielo wasn't profitable at an EBIT level, but managed to grow its revenue by 66%, to CA$4.1m. With any luck the company will be able to grow its way to profitability.

Caveat Emptor

While we can certainly appreciate PharmaCielo's revenue growth, its earnings before interest and tax (EBIT) loss is not ideal. Indeed, it lost a very considerable CA$13m at the EBIT level. Considering that alongside the liabilities mentioned above does not give us much confidence that company should be using so much debt. So we think its balance sheet is a little strained, though not beyond repair. However, it doesn't help that it burned through CA$14m of cash over the last year. So suffice it to say we consider the stock very risky. When analysing debt levels, the balance sheet is the obvious place to start. But ultimately, every company can contain risks that exist outside of the balance sheet. For example, we've discovered 5 warning signs for PharmaCielo (1 is significant!) that you should be aware of before investing here.

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.