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 can see that Relief Therapeutics Holding AG (VTX:RLF) does use debt in its business. But should shareholders be worried about its use of debt?
Why Does Debt Bring Risk?
Debt assists a business until the business has trouble paying it off, either with new capital or with free 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. Of course, plenty of companies use debt to fund growth, without any negative consequences. The first thing to do when considering how much debt a business uses is to look at its cash and debt together.
What Is Relief Therapeutics Holding's Debt?
The image below, which you can click on for greater detail, shows that at December 2021 Relief Therapeutics Holding had debt of CHF1.74m, up from CHF891.0k in one year. However, it does have CHF44.8m in cash offsetting this, leading to net cash of CHF43.0m.
How Strong Is Relief Therapeutics Holding's Balance Sheet?
The latest balance sheet data shows that Relief Therapeutics Holding had liabilities of CHF19.7m due within a year, and liabilities of CHF50.4m falling due after that. Offsetting this, it had CHF44.8m in cash and CHF2.75m in receivables that were due within 12 months. So it has liabilities totalling CHF22.6m more than its cash and near-term receivables, combined.
Given Relief Therapeutics Holding has a market capitalization of CHF208.3m, it's hard to believe these liabilities pose much threat. Having said that, it's clear that we should continue to monitor its balance sheet, lest it change for the worse. While it does have liabilities worth noting, Relief Therapeutics Holding 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 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're focused on the future you can check out this free report showing analyst profit forecasts.
While it hasn't made a profit, at least Relief Therapeutics Holding booked its first revenue as a publicly listed company, in the last twelve months.
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 the fact is that over the last twelve months Relief Therapeutics Holding lost money at the earnings before interest and tax (EBIT) line. And over the same period it saw negative free cash outflow of CHF49m and booked a CHF35m accounting loss. With only CHF43.0m on the balance sheet, it would appear that its going to need to raise capital again soon. Summing up, we're a little skeptical of this one, as it seems fairly risky in the absence of free cashflow. 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. We've identified 5 warning signs with Relief Therapeutics Holding (at least 2 which shouldn't be ignored) , 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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Relief Therapeutics Holding
Relief Therapeutics Holding AG, a biopharmaceutical company, provides patients with therapeutic relief from serious diseases with high unmet medical need in Switzerland, rest of Europe, North America, and internationally.