Is Taiko PharmaceuticalLtd (TSE:4574) A Risky Investment?

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.' When we think about how risky a company is, we always like to look at its use of debt, since debt overload can lead to ruin. We can see that Taiko Pharmaceutical Co.,Ltd. (TSE:4574) does use debt in its business. But should shareholders be worried about its use of debt?

What Risk Does Debt Bring?

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. If things get really bad, the lenders can take control of the business. 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 step when considering a company's debt levels is to consider its cash and debt together.

Check out our latest analysis for Taiko PharmaceuticalLtd

How Much Debt Does Taiko PharmaceuticalLtd Carry?

You can click the graphic below for the historical numbers, but it shows that Taiko PharmaceuticalLtd had JP¥3.21b of debt in December 2023, down from JP¥3.76b, one year before. However, its balance sheet shows it holds JP¥5.48b in cash, so it actually has JP¥2.28b net cash.

A Look At Taiko PharmaceuticalLtd's Liabilities

According to the last reported balance sheet, Taiko PharmaceuticalLtd had liabilities of JP¥3.05b due within 12 months, and liabilities of JP¥3.44b due beyond 12 months. Offsetting this, it had JP¥5.48b in cash and JP¥1.99b in receivables that were due within 12 months. So it actually has JP¥987.0m more liquid assets than total liabilities.

This short term liquidity is a sign that Taiko PharmaceuticalLtd could probably pay off its debt with ease, as its balance sheet is far from stretched. Simply put, the fact that Taiko PharmaceuticalLtd has more cash than debt is arguably a good indication that it can manage its debt safely. When analysing debt levels, the balance sheet is the obvious place to start. But it is Taiko PharmaceuticalLtd's earnings that will influence how the balance sheet holds up in the future. So if you're keen to discover more about its earnings, it might be worth checking out this graph of its long term earnings trend.

Over 12 months, Taiko PharmaceuticalLtd reported revenue of JP¥6.1b, which is a gain of 21%, although it did not report any earnings before interest and tax. Shareholders probably have their fingers crossed that it can grow its way to profits.

So How Risky Is Taiko PharmaceuticalLtd?

Statistically speaking companies that lose money are riskier than those that make money. And the fact is that over the last twelve months Taiko PharmaceuticalLtd lost money at the earnings before interest and tax (EBIT) line. And over the same period it saw negative free cash outflow of JP¥421m and booked a JP¥3.6b accounting loss. While this does make the company a bit risky, it's important to remember it has net cash of JP¥2.28b. That kitty means the company can keep spending for growth for at least two years, at current rates. Taiko PharmaceuticalLtd's revenue growth shone bright over the last year, so it may well be in a position to turn a profit in due course. By investing before those profits, shareholders take on more risk in the hope of bigger rewards. There's no doubt that we learn most about debt from the balance sheet. However, not all investment risk resides within the balance sheet - far from it. We've identified 3 warning signs with Taiko PharmaceuticalLtd (at least 1 which can't be ignored) , and understanding them should be part of your investment process.

When all is said and done, sometimes its easier to focus on companies that don't even need debt. Readers can access a list of growth stocks with zero net debt 100% free, right now.

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.