PharmaCielo (CVE:PCLO) Is Making Moderate Use Of Debt

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. As with many other companies PharmaCielo Ltd. (CVE:PCLO) makes use of debt. But is this debt a concern to shareholders?

When Is Debt A Problem?

Debt assists a business until the business has trouble paying it off, either with new capital or with free cash flow. Ultimately, if the company can't fulfill its legal obligations to repay debt, shareholders could walk away with nothing. 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. 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 thing to do when considering how much debt a business uses is to look at its cash and debt together.

View our latest analysis for PharmaCielo

How Much Debt Does PharmaCielo Carry?

The image below, which you can click on for greater detail, shows that at March 2022 PharmaCielo had debt of CA$7.55m, up from CA$2.92m in one year. However, it does have CA$1.66m in cash offsetting this, leading to net debt of about CA$5.90m.

How Strong Is PharmaCielo's Balance Sheet?

According to the last reported balance sheet, PharmaCielo had liabilities of CA$7.29m due within 12 months, and liabilities of CA$7.74m due beyond 12 months. On the other hand, it had cash of CA$1.66m and CA$570.1k worth of receivables due within a year. So it has liabilities totalling CA$12.8m more than its cash and near-term receivables, combined.

Given PharmaCielo has a market capitalization of CA$83.1m, it's hard to believe these liabilities pose much threat. However, we do think it is worth keeping an eye on its balance sheet strength, as it may change over time. 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 when considering debt, it's definitely worth looking at the earnings trend. Click here for an interactive snapshot.

Over 12 months, PharmaCielo made a loss at the EBIT level, and saw its revenue drop to CA$2.5m, which is a fall of 12%. That's not what we would hope to see.

Caveat Emptor

Not only did PharmaCielo's revenue slip over the last twelve months, but it also produced negative earnings before interest and tax (EBIT). Indeed, it lost a very considerable CA$21m at the EBIT level. When we look at that and recall the liabilities on its balance sheet, relative to cash, it seems unwise to us for the company to have any debt. So we think its balance sheet is a little strained, though not beyond repair. Another cause for caution is that is bled CA$20m in negative free cash flow over the last twelve months. So in short it's a really risky stock. 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. For example PharmaCielo has 5 warning signs (and 2 which are significant) we think you should know about.

If, after all that, you're more interested in a fast growing company with a rock-solid balance sheet, then check out our list of net cash growth stocks without delay.

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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.