Is PharmaCielo (CVE:PCLO) Weighed On By Its Debt Load?

Warren Buffett famously said, 'Volatility is far from synonymous with risk.' 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. Importantly, PharmaCielo Ltd. (CVE:PCLO) does carry debt. But the real question is whether this debt is making the company risky.

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. In the worst case scenario, a company can go bankrupt if it cannot pay its creditors. However, a more frequent (but still costly) occurrence is where a company must issue shares at bargain-basement prices, permanently diluting shareholders, just to shore up its balance sheet. 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 PharmaCielo

How Much Debt Does PharmaCielo Carry?

You can click the graphic below for the historical numbers, but it shows that as of September 2021 PharmaCielo had CA$2.87m of debt, an increase on CA$10.0, over one year. However, it does have CA$6.45m in cash offsetting this, leading to net cash of CA$3.58m.

How Healthy Is PharmaCielo's Balance Sheet?

According to the last reported balance sheet, PharmaCielo had liabilities of CA$9.99m due within 12 months, and liabilities of CA$4.31m due beyond 12 months. Offsetting these obligations, it had cash of CA$6.45m as well as receivables valued at CA$774.3k due within 12 months. So its liabilities total CA$7.07m more than the combination of its cash and short-term receivables.

Of course, PharmaCielo has a market capitalization of CA$148.8m, so these liabilities are probably manageable. However, we do think it is worth keeping an eye on its balance sheet strength, as it may change over time. 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. The balance sheet is clearly the area to focus on when you are analysing debt. But ultimately the future profitability of the business will decide if PharmaCielo can strengthen its balance sheet over time. So if you're focused on the future you can check out this free report showing analyst profit forecasts.

In the last year PharmaCielo wasn't profitable at an EBIT level, but managed to grow its revenue by 2.4%, to CA$2.5m. That rate of growth is a bit slow for our taste, but it takes all types to make a world.

So How Risky Is PharmaCielo?

We have no doubt that loss making companies are, in general, riskier than profitable ones. And the fact is that over the last twelve months PharmaCielo lost money at the earnings before interest and tax (EBIT) line. And over the same period it saw negative free cash outflow of CA$22m and booked a CA$42m accounting loss. Given it only has net cash of CA$3.58m, the company may need to raise more capital if it doesn't reach break-even soon. Overall, we'd say the stock is a bit risky, and we're usually very cautious until we see positive free cash flow. There's no doubt that we learn most about debt from the balance sheet. However, not all investment risk resides within the balance sheet - far from it. Be aware that PharmaCielo is showing 4 warning signs in our investment analysis , and 1 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.