Is Renascience (TSE:4889) Using Too Much Debt?

Howard Marks put it nicely when he said that, rather than worrying about share price volatility, 'The possibility of permanent loss is the risk I worry about... and every practical investor I know worries about.' 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. We note that Renascience Inc. (TSE:4889) does have debt on its balance sheet. But should shareholders be worried about its use of debt?

When Is Debt Dangerous?

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 common (but still painful) scenario is that it has to raise new equity capital at a low price, thus permanently diluting shareholders. 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.

Check out our latest analysis for Renascience

How Much Debt Does Renascience Carry?

The image below, which you can click on for greater detail, shows that at December 2023 Renascience had debt of JP¥356.0m, up from JP¥309.0m in one year. But on the other hand it also has JP¥2.05b in cash, leading to a JP¥1.69b net cash position.

How Strong Is Renascience's Balance Sheet?

According to the last reported balance sheet, Renascience had liabilities of JP¥130.0m due within 12 months, and liabilities of JP¥357.0m due beyond 12 months. Offsetting these obligations, it had cash of JP¥2.05b as well as receivables valued at JP¥11.0m due within 12 months. So it actually has JP¥1.57b more liquid assets than total liabilities.

This surplus strongly suggests that Renascience has a rock-solid balance sheet (and the debt is of no concern whatsoever). On this view, lenders should feel as safe as the beloved of a black-belt karate master. Simply put, the fact that Renascience has more cash than debt is arguably a good indication that it can manage its debt safely. There's no doubt that we learn most about debt from the balance sheet. But you can't view debt in total isolation; since Renascience will need earnings to service that debt. 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, Renascience reported revenue of JP¥190m, which is a gain of 84%, although it did not report any earnings before interest and tax. With any luck the company will be able to grow its way to profitability.

So How Risky Is Renascience?

By their very nature companies that are losing money are more risky than those with a long history of profitability. And the fact is that over the last twelve months Renascience lost money at the earnings before interest and tax (EBIT) line. And over the same period it saw negative free cash outflow of JP¥231m and booked a JP¥331m accounting loss. But the saving grace is the JP¥1.69b on the balance sheet. That kitty means the company can keep spending for growth for at least two years, at current rates. With very solid revenue growth in the last year, Renascience may be on a path to profitability. Pre-profit companies are often risky, but they can also offer great rewards. 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. These risks can be hard to spot. Every company has them, and we've spotted 3 warning signs for Renascience (of which 1 makes us a bit uncomfortable!) 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.

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.