Is CARsgen Therapeutics Holdings (HKG:2171) Using Debt Sensibly?

The external fund manager backed by Berkshire Hathaway's Charlie Munger, Li Lu, makes no bones about it when he says 'The biggest investment risk is not the volatility of prices, but whether you will suffer a permanent loss of capital.' So it might be obvious that you need to consider debt, when you think about how risky any given stock is, because too much debt can sink a company. We note that CARsgen Therapeutics Holdings Limited (HKG:2171) does have debt on its balance sheet. But the more important question is: how much risk is that debt creating?

Why Does Debt Bring Risk?

Debt is a tool to help businesses grow, but if a business is incapable of paying off its lenders, then it exists at their mercy. In the worst case scenario, a company can go bankrupt if it cannot pay its creditors. However, a more frequent (but still costly) occurrence is where a company must issue shares at bargain-basement prices, permanently diluting shareholders, just to shore up its balance sheet. 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.

View our latest analysis for CARsgen Therapeutics Holdings

How Much Debt Does CARsgen Therapeutics Holdings Carry?

The image below, which you can click on for greater detail, shows that at June 2024 CARsgen Therapeutics Holdings had debt of CN¥129.1m, up from CN¥4.98m in one year. But it also has CN¥1.65b in cash to offset that, meaning it has CN¥1.52b net cash.

How Strong Is CARsgen Therapeutics Holdings' Balance Sheet?

According to the last reported balance sheet, CARsgen Therapeutics Holdings had liabilities of CN¥183.7m due within 12 months, and liabilities of CN¥421.5m due beyond 12 months. On the other hand, it had cash of CN¥1.65b and CN¥19.6m worth of receivables due within a year. So it actually has CN¥1.07b more liquid assets than total liabilities.

This surplus liquidity suggests that CARsgen Therapeutics Holdings' balance sheet could take a hit just as well as Homer Simpson's head can take a punch. With this in mind one could posit that its balance sheet means the company is able to handle some adversity. Simply put, the fact that CARsgen Therapeutics Holdings has more cash than debt is arguably a good indication that it can manage its debt safely. The balance sheet is clearly the area to focus on when you are analysing debt. But ultimately the future profitability of the business will decide if CARsgen Therapeutics Holdings can strengthen its balance sheet over time. So if you want to see what the professionals think, you might find this free report on analyst profit forecasts to be interesting.

In the last year CARsgen Therapeutics Holdings 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 CARsgen Therapeutics Holdings?

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 CARsgen Therapeutics Holdings had an earnings before interest and tax (EBIT) loss, truth be told. And over the same period it saw negative free cash outflow of CN¥579m and booked a CN¥695m accounting loss. But the saving grace is the CN¥1.52b on the balance sheet. That kitty means the company can keep spending for growth for at least two years, at current rates. 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. The balance sheet is clearly the area to focus on when you are analysing debt. However, not all investment risk resides within the balance sheet - far from it. Be aware that CARsgen Therapeutics Holdings is showing 2 warning signs in our investment analysis , and 1 of those is a bit concerning...

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.

Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team (at) simplywallst.com.

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.