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.' 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 can see that Calliditas Therapeutics AB (publ) (STO:CALTX) does use debt in its business. 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. Ultimately, if the company can't fulfill its legal obligations to repay debt, shareholders could walk away with nothing. 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. 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. When we examine debt levels, we first consider both cash and debt levels, together.
See our latest analysis for Calliditas Therapeutics
What Is Calliditas Therapeutics's Net Debt?
You can click the graphic below for the historical numbers, but it shows that as of March 2022 Calliditas Therapeutics had kr192.6m of debt, an increase on none, over one year. But on the other hand it also has kr825.4m in cash, leading to a kr632.8m net cash position.
How Strong Is Calliditas Therapeutics' Balance Sheet?
We can see from the most recent balance sheet that Calliditas Therapeutics had liabilities of kr167.1m falling due within a year, and liabilities of kr306.1m due beyond that. Offsetting these obligations, it had cash of kr825.4m as well as receivables valued at kr19.3m due within 12 months. So it actually has kr371.5m more liquid assets than total liabilities.
This surplus suggests that Calliditas Therapeutics has a conservative balance sheet, and could probably eliminate its debt without much difficulty. 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 want to see what the professionals think, you might find this free report on analyst profit forecasts to be interesting.
Over 12 months, Calliditas Therapeutics reported revenue of kr279m, which is a gain of 69,670%, although it did not report any earnings before interest and tax. That's virtually the hole-in-one of revenue growth!
So How Risky Is Calliditas Therapeutics?
Statistically speaking companies that lose money are riskier than those that make money. And in the last year Calliditas Therapeutics had an earnings before interest and tax (EBIT) loss, truth be told. And over the same period it saw negative free cash outflow of kr541m and booked a kr576m accounting loss. While this does make the company a bit risky, it's important to remember it has net cash of kr632.8m. That kitty means the company can keep spending for growth for at least two years, at current rates. 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. High growth pre-profit companies may well be risky, but they can also offer great rewards. 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. For example, we've discovered 1 warning sign for Calliditas Therapeutics that you should be aware of before investing here.
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.
About OM:CALTX
Calliditas Therapeutics
A commercial-stage bio-pharmaceutical company, focused on identifying, developing, and commercializing novel treatments in orphan indications with an initial focus on renal and hepatic diseases with significant unmet medical needs in the United States, Europe, and Asia.
Exceptional growth potential and undervalued.