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

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 can see that Carna Biosciences, Inc. (TYO:4572) does use debt in its business. But is this debt a concern to shareholders?

When Is Debt Dangerous?

Generally speaking, debt only becomes a real problem when a company can't easily pay it off, either by raising capital or with its own cash flow. In the worst case scenario, a company can go bankrupt if it cannot pay its creditors. While that is not too common, we often do see indebted companies permanently diluting shareholders because lenders force them to raise capital at a distressed price. By replacing dilution, though, debt can be an extremely good tool for businesses that need capital to invest in growth 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.

Check out our latest analysis for Carna Biosciences

How Much Debt Does Carna Biosciences Carry?

The image below, which you can click on for greater detail, shows that Carna Biosciences had debt of JP¥428.0m at the end of December 2020, a reduction from JP¥727.0m over a year. But it also has JP¥4.30b in cash to offset that, meaning it has JP¥3.87b net cash.

How Strong Is Carna Biosciences' Balance Sheet?

We can see from the most recent balance sheet that Carna Biosciences had liabilities of JP¥727.0m falling due within a year, and liabilities of JP¥284.0m due beyond that. Offsetting these obligations, it had cash of JP¥4.30b as well as receivables valued at JP¥129.0m due within 12 months. So it actually has JP¥3.42b more liquid assets than total liabilities.

It's good to see that Carna Biosciences has plenty of liquidity on its balance sheet, suggesting conservative management of liabilities. Due to its strong net asset position, it is not likely to face issues with its lenders. Succinctly put, Carna Biosciences boasts net cash, so it's fair to say it does not have a heavy debt load! When analysing debt levels, the balance sheet is the obvious place to start. But it is future earnings, more than anything, that will determine Carna Biosciences's ability to maintain a healthy balance sheet going forward. 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 Carna Biosciences had a loss before interest and tax, and actually shrunk its revenue by 65%, to JP¥1.1b. To be frank that doesn't bode well.

So How Risky Is Carna Biosciences?

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 Carna Biosciences had an earnings before interest and tax (EBIT) loss, over the last year. Indeed, in that time it burnt through JP¥1.3b of cash and made a loss of JP¥1.1b. With only JP¥3.87b on the balance sheet, it would appear that its going to need to raise capital again 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. 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. Be aware that Carna Biosciences is showing 1 warning sign in our investment analysis , you should know about...

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.

When trading Carna Biosciences or any other investment, use the platform considered by many to be the Professional's Gateway to the Worlds Market, Interactive Brokers. You get the lowest-cost* trading on stocks, options, futures, forex, bonds and funds worldwide from a single integrated account. Promoted

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.
^*Interactive Brokers Rated Lowest Cost Broker by StockBrokers.com Annual Online Review 2020

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