Would ZYUS Life Sciences (CVE:ZYUS) Be Better Off With Less Debt?

David Iben put it well when he said, 'Volatility is not a risk we care about. What we care about is avoiding the permanent loss of capital.' 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 ZYUS Life Sciences Corporation (CVE:ZYUS) makes use of debt. But the more important question is: how much risk is that debt creating?

Why Does Debt Bring Risk?

Generally speaking, debt only becomes a real problem when a company can't easily pay it off, either by raising capital or with its own cash flow. Part and parcel of capitalism is the process of 'creative destruction' where failed businesses are mercilessly liquidated by their bankers. 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 step when considering a company's debt levels is to consider its cash and debt together.

Check out our latest analysis for ZYUS Life Sciences

How Much Debt Does ZYUS Life Sciences Carry?

The image below, which you can click on for greater detail, shows that ZYUS Life Sciences had debt of CA$6.79m at the end of December 2023, a reduction from CA$31.7m over a year. However, it does have CA$5.85m in cash offsetting this, leading to net debt of about CA$934.0k.

How Strong Is ZYUS Life Sciences' Balance Sheet?

The latest balance sheet data shows that ZYUS Life Sciences had liabilities of CA$13.2m due within a year, and liabilities of CA$5.27m falling due after that. On the other hand, it had cash of CA$5.85m and CA$627.0k worth of receivables due within a year. So it has liabilities totalling CA$12.0m more than its cash and near-term receivables, combined.

Of course, ZYUS Life Sciences has a market capitalization of CA$77.9m, 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. Carrying virtually no net debt, ZYUS Life Sciences has a very light debt load indeed. When analysing debt levels, the balance sheet is the obvious place to start. But ultimately the future profitability of the business will decide if ZYUS Life Sciences 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.

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

Caveat Emptor

Importantly, ZYUS Life Sciences had an earnings before interest and tax (EBIT) loss over the last year. Indeed, it lost a very considerable CA$19m 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. However, it doesn't help that it burned through CA$18m of cash over the last year. So suffice it to say we consider the stock very risky. The balance sheet is clearly the area to focus on when you are analysing debt. However, not all investment risk resides within the balance sheet - far from it. For instance, we've identified 3 warning signs for ZYUS Life Sciences (1 shouldn't be ignored) you should be aware of.

When all is said and done, sometimes its easier to focus on companies that don't even need debt. Readers can access a list of growth stocks with zero net debt 100% free, right now.

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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.