Health Check: How Prudently Does Calliditas Therapeutics (STO:CALTX) 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.' 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 Calliditas Therapeutics AB (publ) (STO:CALTX) does have debt on its balance sheet. 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. If things get really bad, the lenders can take control of the business. 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, the upside of debt is that it often represents cheap capital, especially when it replaces dilution in a company with the ability to reinvest 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.

Our analysis indicates that CALTX is potentially undervalued!

What Is Calliditas Therapeutics's Net Debt?

You can click the graphic below for the historical numbers, but it shows that as of September 2022 Calliditas Therapeutics had kr448.1m of debt, an increase on kr187.4m, over one year. However, it does have kr736.2m in cash offsetting this, leading to net cash of kr288.0m.

A Look At Calliditas Therapeutics' Liabilities

Zooming in on the latest balance sheet data, we can see that Calliditas Therapeutics had liabilities of kr220.1m due within 12 months and liabilities of kr572.1m due beyond that. Offsetting these obligations, it had cash of kr736.2m as well as receivables valued at kr187.2m due within 12 months. So it actually has kr131.2m more liquid assets than total liabilities.

This short term liquidity is a sign that Calliditas Therapeutics could probably pay off its debt with ease, as its balance sheet is far from stretched. Simply put, the fact that Calliditas Therapeutics 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 ultimately the future profitability of the business will decide if Calliditas Therapeutics can strengthen its balance sheet over time. So if you're focused on the future you can check out this free report showing analyst profit forecasts.

Over 12 months, Calliditas Therapeutics reported revenue of kr405m, which is a gain of 104%, although it did not report any earnings before interest and tax. So its pretty obvious shareholders are hoping for more growth!

So How Risky Is Calliditas Therapeutics?

Statistically speaking companies that lose money are riskier than those that make money. And the fact is that over the last twelve months Calliditas Therapeutics lost money at the earnings before interest and tax (EBIT) line. And over the same period it saw negative free cash outflow of kr724m and booked a kr628m accounting loss. But the saving grace is the kr288.0m on the balance sheet. That means it could keep spending at its current rate for more than two years. The good news for shareholders is that Calliditas Therapeutics has dazzling revenue growth, so there's a very good chance it can boost its free cash flow in the years to come. While unprofitable companies can be risky, they can also grow hard and fast in those pre-profit years. There's no doubt that we learn most about debt from the balance sheet. However, not all investment risk resides within the balance sheet - far from it. Be aware that Calliditas Therapeutics is showing 1 warning sign in our investment analysis , 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.

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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.