Health Check: How Prudently Does Ascelia Pharma (STO:ACE) Use 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.' When we think about how risky a company is, we always like to look at its use of debt, since debt overload can lead to ruin. We note that Ascelia Pharma AB (publ) (STO:ACE) does have debt on its balance sheet. But should shareholders be worried about its use of debt?

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

See our latest analysis for Ascelia Pharma

What Is Ascelia Pharma's Debt?

The image below, which you can click on for greater detail, shows that at September 2024 Ascelia Pharma had debt of kr26.2m, up from none in one year. But it also has kr95.7m in cash to offset that, meaning it has kr69.5m net cash.

How Healthy Is Ascelia Pharma's Balance Sheet?

The latest balance sheet data shows that Ascelia Pharma had liabilities of kr27.6m due within a year, and liabilities of kr26.2m falling due after that. On the other hand, it had cash of kr95.7m and kr2.60m worth of receivables due within a year. So it actually has kr44.5m more liquid assets than total liabilities.

It's good to see that Ascelia Pharma has plenty of liquidity on its balance sheet, suggesting conservative management of liabilities. Given it has easily adequate short term liquidity, we don't think it will have any issues with its lenders. Simply put, the fact that Ascelia Pharma has more cash than debt is arguably a good indication that it can manage its debt safely. The balance sheet is clearly the area to focus on when you are analysing debt. But it is future earnings, more than anything, that will determine Ascelia Pharma'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.

Given its lack of meaningful operating revenue, Ascelia Pharma shareholders no doubt hope it can fund itself until it has a profitable product.

So How Risky Is Ascelia Pharma?

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 Ascelia Pharma had an earnings before interest and tax (EBIT) loss, over the last year. And over the same period it saw negative free cash outflow of kr60m and booked a kr62m accounting loss. However, it has net cash of kr69.5m, so it has a bit of time before it will need more capital. 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. However, not all investment risk resides within the balance sheet - far from it. For example, we've discovered 5 warning signs for Ascelia Pharma (3 are potentially serious!) that you should be aware of before investing here.

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.

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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.