Is Pangaea Oncology (BME:PANG) Weighed On By Its Debt Load?

Howard Marks put it nicely when he said that, rather than worrying about share price volatility, 'The possibility of permanent loss is the risk I worry about... and every practical investor I know worries about.' So it seems the smart money knows that debt - which is usually involved in bankruptcies - is a very important factor, when you assess how risky a company is. We note that Pangaea Oncology, S.A. (BME:PANG) does have debt on its balance sheet. But should shareholders be worried about its use of debt?

What Risk Does Debt Bring?

Debt assists a business until the business has trouble paying it off, either with new capital or with free cash flow. In the worst case scenario, a company can go bankrupt if it cannot pay its creditors. 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. Having said that, the most common situation is where a company manages its debt reasonably well - and to its own advantage. The first step when considering a company's debt levels is to consider its cash and debt together.

See our latest analysis for Pangaea Oncology

How Much Debt Does Pangaea Oncology Carry?

You can click the graphic below for the historical numbers, but it shows that Pangaea Oncology had €2.34m of debt in June 2023, down from €3.32m, one year before. However, it does have €5.07m in cash offsetting this, leading to net cash of €2.73m.

How Healthy Is Pangaea Oncology's Balance Sheet?

We can see from the most recent balance sheet that Pangaea Oncology had liabilities of €3.67m falling due within a year, and liabilities of €1.94m due beyond that. Offsetting this, it had €5.07m in cash and €4.36m in receivables that were due within 12 months. So it actually has €3.82m more liquid assets than total liabilities.

This short term liquidity is a sign that Pangaea Oncology could probably pay off its debt with ease, as its balance sheet is far from stretched. Succinctly put, Pangaea Oncology 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 ultimately the future profitability of the business will decide if Pangaea Oncology can strengthen its balance sheet over time. So if you're focused on the future you can check out this free report showing analyst profit forecasts.

In the last year Pangaea Oncology's revenue was pretty flat, and it made a negative EBIT. While that hardly impresses, its not too bad either.

So How Risky Is Pangaea Oncology?

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 Pangaea Oncology lost money at the earnings before interest and tax (EBIT) line. Indeed, in that time it burnt through €3.6m of cash and made a loss of €2.7m. With only €2.73m on the balance sheet, it would appear that its going to need to raise capital again soon. Even though its balance sheet seems sufficiently liquid, debt always makes us a little nervous if a company doesn't produce free cash flow regularly. 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. Case in point: We've spotted 1 warning sign for Pangaea Oncology you should be aware of.

At the end of the day, it's often better to focus on companies that are free from net debt. You can access our special list of such companies (all with a track record of profit growth). It's free.

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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.