Does Cutia Therapeutics (HKG:2487) Have A Healthy Balance Sheet?

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. Importantly, Cutia Therapeutics (HKG:2487) does carry debt. But the real question is whether this debt is making the company risky.

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. Ultimately, if the company can't fulfill its legal obligations to repay debt, shareholders could walk away with nothing. 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. Having said that, the most common situation is where a company manages its debt reasonably well - and to its own advantage. The first thing to do when considering how much debt a business uses is to look at its cash and debt together.

See our latest analysis for Cutia Therapeutics

How Much Debt Does Cutia Therapeutics Carry?

You can click the graphic below for the historical numbers, but it shows that as of June 2024 Cutia Therapeutics had CN¥210.3m of debt, an increase on CN¥69.4m, over one year. But it also has CN¥1.04b in cash to offset that, meaning it has CN¥828.8m net cash.

A Look At Cutia Therapeutics' Liabilities

Zooming in on the latest balance sheet data, we can see that Cutia Therapeutics had liabilities of CN¥237.8m due within 12 months and liabilities of CN¥81.7m due beyond that. Offsetting this, it had CN¥1.04b in cash and CN¥54.6m in receivables that were due within 12 months. So it actually has CN¥774.3m more liquid assets than total liabilities.

This surplus suggests that Cutia Therapeutics is using debt in a way that is appears to be both safe and conservative. Given it has easily adequate short term liquidity, we don't think it will have any issues with its lenders. Succinctly put, Cutia Therapeutics boasts net cash, so it's fair to say it does not have a heavy debt load! 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 Cutia Therapeutics'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.

In the last year Cutia Therapeutics wasn't profitable at an EBIT level, but managed to grow its revenue by 341%, to CN¥199m. That's virtually the hole-in-one of revenue growth!

So How Risky Is Cutia Therapeutics?

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 Cutia Therapeutics 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¥437m and booked a CN¥524m accounting loss. But at least it has CN¥828.8m on the balance sheet to spend on growth, near-term. The good news for shareholders is that Cutia Therapeutics has dazzling revenue growth, so there's a very good chance it can boost its free cash flow in the years to come. While unprofitable companies can be risky, they can also grow hard and fast in those pre-profit years. When analysing debt levels, the balance sheet is the obvious place to start. But ultimately, every company can contain risks that exist outside of the balance sheet. For example Cutia Therapeutics has 2 warning signs (and 1 which doesn't sit too well with us) we think you should know about.

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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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.