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.' 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 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. In the worst case scenario, a company can go bankrupt if it cannot pay its creditors. 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. Of course, plenty of companies use debt to fund growth, without any negative consequences. The first step when considering a company's debt levels is to consider its cash and debt together.

View our latest analysis for Egetis Therapeutics

How Much Debt Does Egetis Therapeutics Carry?

As you can see below, at the end of March 2024, Egetis Therapeutics had kr117.5m of debt, up from none a year ago. Click the image for more detail. However, its balance sheet shows it holds kr251.7m in cash, so it actually has kr134.2m net cash.

How Healthy Is Egetis Therapeutics' Balance Sheet?

According to the last reported balance sheet, Egetis Therapeutics had liabilities of kr112.7m due within 12 months, and liabilities of kr114.7m due beyond 12 months. Offsetting this, it had kr251.7m in cash and kr28.2m in receivables that were due within 12 months. So it actually has kr52.5m more liquid assets than total liabilities.

This surplus suggests that Egetis Therapeutics has a conservative balance sheet, and could probably eliminate its debt without much difficulty. Simply put, the fact that Egetis Therapeutics has more cash than debt is arguably a good indication that it can manage its debt safely. When analysing debt levels, the balance sheet is the obvious place to start. But ultimately the future profitability of the business will decide if Egetis 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.

In the last year Egetis Therapeutics wasn't profitable at an EBIT level, but managed to grow its revenue by 182%, to kr63m. 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 in the last year Egetis 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 kr254m and booked a kr327m accounting loss. With only kr134.2m on the balance sheet, it would appear that its going to need to raise capital again soon. Importantly, Egetis Therapeutics's revenue growth is hot to trot. High growth pre-profit companies may well be risky, but they can also offer great rewards. The balance sheet is clearly the area to focus on when you are analysing debt. But ultimately, every company can contain risks that exist outside of the balance sheet. For example, we've discovered 3 warning signs for Egetis Therapeutics (1 is a bit unpleasant!) 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.