Health Check: How Prudently Does Carna Biosciences (TYO:4572) Use Debt?

Warren Buffett famously said, 'Volatility is far from synonymous with risk.' 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 can see that Carna Biosciences, Inc. (TYO:4572) does use debt in its business. 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. In the worst case scenario, a company can go bankrupt if it cannot pay its creditors. 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, plenty of companies use debt to fund growth, without any negative consequences. When we examine debt levels, we first consider both cash and debt levels, together.

See our latest analysis for Carna Biosciences

What Is Carna Biosciences's Net Debt?

As you can see below, Carna Biosciences had JP¥496.0m of debt at September 2020, down from JP¥795.0m a year prior. But on the other hand it also has JP¥4.75b in cash, leading to a JP¥4.25b net cash position.

How Strong Is Carna Biosciences's Balance Sheet?

The latest balance sheet data shows that Carna Biosciences had liabilities of JP¥624.0m due within a year, and liabilities of JP¥313.0m falling due after that. On the other hand, it had cash of JP¥4.75b and JP¥91.0m worth of receivables due within a year. So it can boast JP¥3.90b more liquid assets than total liabilities.

This surplus suggests that Carna Biosciences is using debt in a way that is appears to be both safe and conservative. Because it has plenty of assets, it is unlikely to have trouble with its lenders. Simply put, the fact that Carna Biosciences 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 ultimately the future profitability of the business will decide if Carna Biosciences 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.

Over 12 months, Carna Biosciences made a loss at the EBIT level, and saw its revenue drop to JP¥1.2b, which is a fall of 61%. That makes us nervous, to say the least.

So How Risky Is Carna Biosciences?

Although Carna Biosciences had an earnings before interest and tax (EBIT) loss over the last twelve months, it generated positive free cash flow of JP¥1.1b. So although it is loss-making, it doesn't seem to have too much near-term balance sheet risk, keeping in mind the net cash. With mediocre revenue growth in the last year, we're don't find the investment opportunity particularly compelling. The balance sheet is clearly the area to focus on when you are analysing debt. But ultimately, every company can contain risks that exist outside of the balance sheet. For instance, we've identified 2 warning signs for Carna Biosciences that 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. 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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