Is Egetis Therapeutics (STO:EGTX) Using Debt Sensibly?

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 seems the smart money knows that debt - which is usually involved in bankruptcies - is a very important factor, when you assess how risky a company is. We note that Egetis Therapeutics AB (publ) (STO:EGTX) does have debt on its balance sheet. But the real question is whether this debt is making the company risky.

When Is Debt Dangerous?

Debt and other liabilities become risky for a business when it cannot easily fulfill those obligations, either with free cash flow or by raising capital at an attractive price. Part and parcel of capitalism is the process of 'creative destruction' where failed businesses are mercilessly liquidated by their bankers. 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. When we think about a company's use of debt, we first look at cash and debt together.

See our latest analysis for Egetis Therapeutics

What Is Egetis Therapeutics's Net Debt?

As you can see below, at the end of September 2024, Egetis Therapeutics had kr111.2m of debt, up from none a year ago. Click the image for more detail. However, it does have kr129.9m in cash offsetting this, leading to net cash of kr18.7m.

How Healthy Is Egetis Therapeutics' Balance Sheet?

Zooming in on the latest balance sheet data, we can see that Egetis Therapeutics had liabilities of kr167.0m due within 12 months and liabilities of kr91.9m due beyond that. Offsetting these obligations, it had cash of kr129.9m as well as receivables valued at kr29.0m due within 12 months. So its liabilities total kr100.0m more than the combination of its cash and short-term receivables.

Of course, Egetis Therapeutics has a market capitalization of kr2.24b, so these liabilities are probably manageable. However, we do think it is worth keeping an eye on its balance sheet strength, as it may change over time. While it does have liabilities worth noting, Egetis Therapeutics also has more cash than debt, so we're pretty confident it can manage its debt safely. When analysing debt levels, the balance sheet is the obvious place to start. But it is future earnings, more than anything, that will determine Egetis Therapeutics'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.

In the last year Egetis Therapeutics wasn't profitable at an EBIT level, but managed to grow its revenue by 121%, to kr68m. So there's no doubt that shareholders are cheering for growth

So How Risky Is Egetis Therapeutics?

By their very nature companies that are losing money are more risky than those with a long history of profitability. And the fact is that over the last twelve months Egetis Therapeutics lost money at the earnings before interest and tax (EBIT) line. Indeed, in that time it burnt through kr216m of cash and made a loss of kr319m. Given it only has net cash of kr18.7m, the company may need to raise more capital if it doesn't reach break-even soon. The good news for shareholders is that Egetis 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. 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. To that end, you should learn about the 3 warning signs we've spotted with Egetis Therapeutics (including 1 which doesn't sit too well with us) .

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.

Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team (at) simplywallst.com.

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.