Is IRLAB Therapeutics (STO:IRLAB A) Using Debt Sensibly?

Some say volatility, rather than debt, is the best way to think about risk as an investor, but Warren Buffett famously said that 'Volatility is far from synonymous with risk.' 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 note that IRLAB Therapeutics AB (publ) (STO:IRLAB A) does have debt on its balance sheet. But is this debt a concern to shareholders?

When Is Debt Dangerous?

Debt assists a business until the business has trouble paying it off, either with new capital or with free cash flow. In the worst case scenario, a company can go bankrupt if it cannot pay its creditors. However, a more common (but still painful) scenario is that it has to raise new equity capital at a low price, thus permanently diluting shareholders. 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 examine debt levels, we first consider both cash and debt levels, together.

See our latest analysis for IRLAB Therapeutics

What Is IRLAB Therapeutics's Debt?

As you can see below, at the end of June 2024, IRLAB Therapeutics had kr54.1m of debt, up from none a year ago. Click the image for more detail. But it also has kr98.3m in cash to offset that, meaning it has kr44.2m net cash.

How Healthy Is IRLAB Therapeutics' Balance Sheet?

According to the last reported balance sheet, IRLAB Therapeutics had liabilities of kr142.3m due within 12 months, and liabilities of kr2.60m due beyond 12 months. On the other hand, it had cash of kr98.3m and kr65.1m worth of receivables due within a year. So it actually has kr18.5m more liquid assets than total liabilities.

This surplus suggests that IRLAB Therapeutics has a conservative balance sheet, and could probably eliminate its debt without much difficulty. Simply put, the fact that IRLAB 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 it is future earnings, more than anything, that will determine IRLAB Therapeutics'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.

In the last year IRLAB Therapeutics wasn't profitable at an EBIT level, but managed to grow its revenue by 17%, to kr42m. We usually like to see faster growth from unprofitable companies, but each to their own.

So How Risky Is IRLAB Therapeutics?

By their very nature companies that are losing money are more risky than those with a long history of profitability. And we do note that IRLAB Therapeutics had an earnings before interest and tax (EBIT) loss, over the last year. And over the same period it saw negative free cash outflow of kr109m and booked a kr119m accounting loss. Given it only has net cash of kr44.2m, the company may need to raise more capital if it doesn't reach break-even 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. When analysing debt levels, the balance sheet is the obvious place to start. But ultimately, every company can contain risks that exist outside of the balance sheet. To that end, you should be aware of the 4 warning signs we've spotted with IRLAB Therapeutics .

When all is said and done, sometimes its easier to focus on companies that don't even need debt. Readers can access a list of growth stocks with zero net debt 100% free, right now.

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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.