Hemogenyx Pharmaceuticals (LON:HEMO) Has Debt But No Earnings; Should You Worry?

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.' 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. Importantly, Hemogenyx Pharmaceuticals Plc (LON:HEMO) does carry debt. But the more important question is: how much risk is that debt creating?

What Risk Does Debt Bring?

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. Ultimately, if the company can't fulfill its legal obligations to repay debt, shareholders could walk away with nothing. However, a more usual (but still expensive) situation is where a company must dilute shareholders at a cheap share price simply to get debt under control. Of course, the upside of debt is that it often represents cheap capital, especially when it replaces dilution in a company with the ability to reinvest at high rates of return. The first thing to do when considering how much debt a business uses is to look at its cash and debt together.

View our latest analysis for Hemogenyx Pharmaceuticals

What Is Hemogenyx Pharmaceuticals's Debt?

The image below, which you can click on for greater detail, shows that Hemogenyx Pharmaceuticals had debt of UK£1.50m at the end of June 2021, a reduction from UK£1.65m over a year. However, its balance sheet shows it holds UK£10.6m in cash, so it actually has UK£9.06m net cash.

A Look At Hemogenyx Pharmaceuticals' Liabilities

According to the balance sheet data, Hemogenyx Pharmaceuticals had liabilities of UK£1.80m due within 12 months, but no longer term liabilities. On the other hand, it had cash of UK£10.6m and UK£84.7k worth of receivables due within a year. So it can boast UK£8.85m more liquid assets than total liabilities.

This surplus liquidity suggests that Hemogenyx Pharmaceuticals' balance sheet could take a hit just as well as Homer Simpson's head can take a punch. On this view, lenders should feel as safe as the beloved of a black-belt karate master. Simply put, the fact that Hemogenyx Pharmaceuticals has more cash than debt is arguably a good indication that it can manage its debt safely. There's no doubt that we learn most about debt from the balance sheet. But you can't view debt in total isolation; since Hemogenyx Pharmaceuticals will need earnings to service that debt. So when considering debt, it's definitely worth looking at the earnings trend. Click here for an interactive snapshot.

Since Hemogenyx Pharmaceuticals doesn't have significant operating revenue, shareholders may be hoping it comes up with a great new product, before it runs out of money.

So How Risky Is Hemogenyx Pharmaceuticals?

By their very nature companies that are losing money are more risky than those with a long history of profitability. And we do note that Hemogenyx Pharmaceuticals had an earnings before interest and tax (EBIT) loss, over the last year. And over the same period it saw negative free cash outflow of UK£2.3m and booked a UK£4.9m accounting loss. Given it only has net cash of UK£9.06m, the company may need to raise more capital if it doesn't reach break-even soon. Overall, its balance sheet doesn't seem overly risky, at the moment, but we're always cautious until we see the positive free cash flow. 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. Be aware that Hemogenyx Pharmaceuticals is showing 4 warning signs in our investment analysis , and 3 of those are a bit unpleasant...

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.

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.

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