Health Check: How Prudently Does Relief Therapeutics Holding (VTX:RLF) Use Debt?

Some say volatility, rather than debt, is the best way to think about risk as an investor, but Warren Buffett famously said that 'Volatility is far from synonymous with risk.' 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. Importantly, Relief Therapeutics Holding AG (VTX:RLF) does carry debt. But is this debt a concern to shareholders?

When Is Debt A Problem?

Debt and other liabilities become risky for a business when it cannot easily fulfill those obligations, either with free cash flow or by raising capital at an attractive price. In the worst case scenario, a company can go bankrupt if it cannot pay its creditors. 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. Of course, debt can be an important tool in businesses, particularly capital heavy businesses. The first step when considering a company's debt levels is to consider its cash and debt together.

View our latest analysis for Relief Therapeutics Holding

How Much Debt Does Relief Therapeutics Holding Carry?

As you can see below, Relief Therapeutics Holding had CHF1.67m of debt at December 2022, down from CHF1.74m a year prior. But on the other hand it also has CHF19.2m in cash, leading to a CHF17.6m net cash position.

A Look At Relief Therapeutics Holding's Liabilities

The latest balance sheet data shows that Relief Therapeutics Holding had liabilities of CHF10.7m due within a year, and liabilities of CHF32.7m falling due after that. Offsetting this, it had CHF19.2m in cash and CHF2.26m in receivables that were due within 12 months. So it has liabilities totalling CHF21.9m more than its cash and near-term receivables, combined.

This deficit isn't so bad because Relief Therapeutics Holding is worth CHF87.7m, and thus could probably raise enough capital to shore up its balance sheet, if the need arose. But we definitely want to keep our eyes open to indications that its debt is bringing too much risk. Despite its noteworthy liabilities, Relief Therapeutics Holding boasts net cash, so it's fair to say it does not have a heavy debt load! There's no doubt that we learn most about debt from the balance sheet. But it is future earnings, more than anything, that will determine Relief Therapeutics Holding's ability to maintain a healthy balance sheet going forward. So if you want to see what the professionals think, you might find this free report on analyst profit forecasts to be interesting.

Over 12 months, Relief Therapeutics Holding reported revenue of CHF6.1m, which is a gain of 83%, although it did not report any earnings before interest and tax. Shareholders probably have their fingers crossed that it can grow its way to profits.

So How Risky Is Relief Therapeutics Holding?

We have no doubt that loss making companies are, in general, riskier than profitable ones. And in the last year Relief Therapeutics Holding had an earnings before interest and tax (EBIT) loss, truth be told. And over the same period it saw negative free cash outflow of CHF25m and booked a CHF51m accounting loss. Given it only has net cash of CHF17.6m, the company may need to raise more capital if it doesn't reach break-even soon. With very solid revenue growth in the last year, Relief Therapeutics Holding may be on a path to profitability. Pre-profit companies are often risky, but they can also offer great rewards. The balance sheet is clearly the area to focus on when you are analysing debt. But ultimately, every company can contain risks that exist outside of the balance sheet. Be aware that Relief Therapeutics Holding is showing 5 warning signs in our investment analysis , and 2 of those don't sit too well with us...

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.