Is Pyrum Innovations (OB:PYRUM) Using Debt In A Risky Way?

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 Pyrum Innovations AG (OB:PYRUM) does use debt in its business. But should shareholders be worried about its use of debt?

Why Does Debt Bring Risk?

Debt assists a business until the business has trouble paying it off, either with new capital or with free cash flow. Ultimately, if the company can't fulfill its legal obligations to repay debt, shareholders could walk away with nothing. 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. Of course, debt can be an important tool in businesses, particularly capital heavy businesses. The first step when considering a company's debt levels is to consider its cash and debt together.

Check out our latest analysis for Pyrum Innovations

What Is Pyrum Innovations's Net Debt?

As you can see below, Pyrum Innovations had €3.72m of debt at September 2023, down from €9.07m a year prior. However, its balance sheet shows it holds €4.62m in cash, so it actually has €902.5k net cash.

How Healthy Is Pyrum Innovations' Balance Sheet?

According to the last reported balance sheet, Pyrum Innovations had liabilities of €2.52m due within 12 months, and liabilities of €22.0m due beyond 12 months. Offsetting this, it had €4.62m in cash and €150.3k in receivables that were due within 12 months. So its liabilities total €19.8m more than the combination of its cash and short-term receivables.

Since publicly traded Pyrum Innovations shares are worth a total of €123.5m, it seems unlikely that this level of liabilities would be a major threat. Having said that, it's clear that we should continue to monitor its balance sheet, lest it change for the worse. Despite its noteworthy liabilities, Pyrum Innovations 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 it is future earnings, more than anything, that will determine Pyrum Innovations's ability to maintain a healthy balance sheet going forward. So if you're focused on the future you can check out this free report showing analyst profit forecasts.

Over 12 months, Pyrum Innovations saw its revenue hold pretty steady, and it did not report positive earnings before interest and tax. While that's not too bad, we'd prefer see growth.

So How Risky Is Pyrum Innovations?

By their very nature companies that are losing money are more risky than those with a long history of profitability. And in the last year Pyrum Innovations had an earnings before interest and tax (EBIT) loss, truth be told. Indeed, in that time it burnt through €23m of cash and made a loss of €9.0m. With only €902.5k on the balance sheet, it would appear that its going to need to raise capital again soon. Overall, we'd say the stock is a bit risky, and we're usually very cautious until we see positive free cash flow. When analysing debt levels, the balance sheet is the obvious place to start. 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 2 warning signs for Pyrum Innovations (of which 1 is concerning!) you should know about.

Of course, if you're the type of investor who prefers buying stocks without the burden of debt, then don't hesitate to discover our exclusive list of net cash growth stocks, today.

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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.