Does Relief Therapeutics Holding (VTX:RLF) Have A Healthy Balance Sheet?

Legendary fund manager Li Lu (who Charlie Munger backed) once said, 'The biggest investment risk is not the volatility of prices, but whether you will suffer a permanent loss of capital.' It's only natural to consider a company's balance sheet when you examine how risky it is, since debt is often involved when a business collapses. We note that Relief Therapeutics Holding AG (VTX:RLF) does have debt on its balance sheet. But is this debt a concern to shareholders?

What Risk Does Debt Bring?

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. 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. Of course, plenty of companies use debt to fund growth, without any negative consequences. When we think about a company's use of debt, we first look at cash and debt together.

Check out our latest analysis for Relief Therapeutics Holding

What Is Relief Therapeutics Holding's Net Debt?

As you can see below, Relief Therapeutics Holding had CHF1.66m of debt at June 2022, down from CHF6.42m a year prior. However, its balance sheet shows it holds CHF29.9m in cash, so it actually has CHF28.2m net cash.

How Healthy Is Relief Therapeutics Holding's Balance Sheet?

According to the last reported balance sheet, Relief Therapeutics Holding had liabilities of CHF12.5m due within 12 months, and liabilities of CHF47.9m due beyond 12 months. Offsetting this, it had CHF29.9m in cash and CHF3.52m in receivables that were due within 12 months. So it has liabilities totalling CHF27.0m more than its cash and near-term receivables, combined.

This deficit isn't so bad because Relief Therapeutics Holding is worth CHF122.4m, and thus could probably raise enough capital to shore up its balance sheet, if the need arose. But it's clear that we should definitely closely examine whether it can manage its debt without dilution. Despite its noteworthy liabilities, Relief Therapeutics Holding boasts net cash, so it's fair to say it does not have a heavy debt load! When analysing debt levels, the balance sheet is the obvious place to start. But it is Relief Therapeutics Holding'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 Relief Therapeutics Holding managed to produce its first revenue as a listed company, but given the lack of profit, shareholders will no doubt be hoping to see some strong increases.

So How Risky Is Relief Therapeutics Holding?

By their very nature companies that are losing money are more risky than those with a long history of profitability. And in the last year Relief Therapeutics Holding had an earnings before interest and tax (EBIT) loss, truth be told. Indeed, in that time it burnt through CHF33m of cash and made a loss of CHF47m. Given it only has net cash of CHF28.2m, the company may need to raise more capital if it doesn't reach break-even soon. Summing up, we're a little skeptical of this one, as it seems fairly risky in the absence of free cashflow. When analysing debt levels, the balance sheet is the obvious place to start. However, not all investment risk resides within the balance sheet - far from it. We've identified 3 warning signs with Relief Therapeutics Holding , and understanding them should be part of your investment process.

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.