Is Renascience (TSE:4889) Weighed On By Its Debt Load?

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. Importantly, Renascience Inc. (TSE:4889) does carry debt. But the real question is whether this debt is making the company risky.

Why Does Debt Bring Risk?

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. Part and parcel of capitalism is the process of 'creative destruction' where failed businesses are mercilessly liquidated by their bankers. 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. Of course, debt can be an important tool in businesses, particularly capital heavy businesses. When we examine debt levels, we first consider both cash and debt levels, together.

See our latest analysis for Renascience

What Is Renascience's Net Debt?

The chart below, which you can click on for greater detail, shows that Renascience had JP¥365.0m in debt in September 2024; about the same as the year before. But it also has JP¥1.91b in cash to offset that, meaning it has JP¥1.54b net cash.

How Strong Is Renascience's Balance Sheet?

According to the last reported balance sheet, Renascience had liabilities of JP¥57.0m due within 12 months, and liabilities of JP¥367.0m due beyond 12 months. On the other hand, it had cash of JP¥1.91b and JP¥4.00m worth of receivables due within a year. So it can boast JP¥1.49b more liquid assets than total liabilities.

This luscious liquidity implies that Renascience's balance sheet is sturdy like a giant sequoia tree. On this view, lenders should feel as safe as the beloved of a black-belt karate master. Succinctly put, Renascience boasts net cash, so it's fair to say it does not have a heavy debt load! 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 when considering debt, it's definitely worth looking at the earnings trend. Click here for an interactive snapshot.

In the last year Renascience had a loss before interest and tax, and actually shrunk its revenue by 36%, to JP¥129m. That makes us nervous, to say the least.

So How Risky Is Renascience?

Statistically speaking companies that lose money are riskier than those that make money. And in the last year Renascience had an earnings before interest and tax (EBIT) loss, truth be told. Indeed, in that time it burnt through JP¥279m of cash and made a loss of JP¥235m. But the saving grace is the JP¥1.54b on the balance sheet. That means it could keep spending at its current rate for more than two years. 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. There's no doubt that we learn most about debt from the balance sheet. But ultimately, every company can contain risks that exist outside of the balance sheet. We've identified 3 warning signs with Renascience (at least 2 which shouldn't be ignored) , and understanding them should be part of your investment process.

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. 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.