Is Initiator Pharma (STO:INIT) Using Debt In A Risky Way?

David Iben put it well when he said, 'Volatility is not a risk we care about. What we care about is avoiding the permanent loss of capital.' So it might be obvious that you need to consider debt, when you think about how risky any given stock is, because too much debt can sink a company. Importantly, Initiator Pharma A/S (STO:INIT) does carry debt. But is this debt a concern to shareholders?

What Risk Does Debt Bring?

Debt is a tool to help businesses grow, but if a business is incapable of paying off its lenders, then it exists at their mercy. Part and parcel of capitalism is the process of 'creative destruction' where failed businesses are mercilessly liquidated by their bankers. However, a more usual (but still expensive) situation is where a company must dilute shareholders at a cheap share price simply to get debt under control. Having said that, the most common situation is where a company manages its debt reasonably well - and to its own advantage. The first step when considering a company's debt levels is to consider its cash and debt together.

View our latest analysis for Initiator Pharma

What Is Initiator Pharma's Debt?

You can click the graphic below for the historical numbers, but it shows that Initiator Pharma had kr.12.7m of debt in March 2023, down from kr.13.3m, one year before. However, it does have kr.33.7m in cash offsetting this, leading to net cash of kr.21.0m.

How Healthy Is Initiator Pharma's Balance Sheet?

We can see from the most recent balance sheet that Initiator Pharma had liabilities of kr.2.09m falling due within a year, and liabilities of kr.12.7m due beyond that. On the other hand, it had cash of kr.33.7m and kr.5.84m worth of receivables due within a year. So it can boast kr.24.8m more liquid assets than total liabilities.

This short term liquidity is a sign that Initiator Pharma could probably pay off its debt with ease, as its balance sheet is far from stretched. Succinctly put, Initiator Pharma boasts net cash, so it's fair to say it does not have a heavy debt load! There's no doubt that we learn most about debt from the balance sheet. But it is future earnings, more than anything, that will determine Initiator Pharma's ability to maintain a healthy balance sheet going forward. So if you're focused on the future you can check out this free report showing analyst profit forecasts.

Since Initiator Pharma doesn't have significant operating revenue, shareholders may be hoping it comes up with a great new product, before it runs out of money.

So How Risky Is Initiator Pharma?

Statistically speaking companies that lose money are riskier than those that make money. And the fact is that over the last twelve months Initiator Pharma lost money at the earnings before interest and tax (EBIT) line. Indeed, in that time it burnt through kr.30m of cash and made a loss of kr.33m. With only kr.21.0m on the balance sheet, it would appear that its going to need to raise capital again soon. 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. We've identified 5 warning signs with Initiator Pharma (at least 2 which are significant) , and understanding them should be part of your investment process.

If, after all that, you're more interested in a fast growing company with a rock-solid balance sheet, then check out our list of net cash growth stocks without delay.

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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.