Is Tanvex BioPharma (TPE:6541) Using Too Much Debt?

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. Importantly, Tanvex BioPharma, Inc. (TPE:6541) does carry debt. But should shareholders be worried about its use of debt?

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. If things get really bad, the lenders can take control of the business. 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. 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. The first thing to do when considering how much debt a business uses is to look at its cash and debt together.

See our latest analysis for Tanvex BioPharma

What Is Tanvex BioPharma's Net Debt?

You can click the graphic below for the historical numbers, but it shows that as of September 2020 Tanvex BioPharma had NT$93.3m of debt, an increase on none, over one year. But it also has NT$771.8m in cash to offset that, meaning it has NT$678.5m net cash.

How Strong Is Tanvex BioPharma's Balance Sheet?

We can see from the most recent balance sheet that Tanvex BioPharma had liabilities of NT$308.3m falling due within a year, and liabilities of NT$268.7m due beyond that. On the other hand, it had cash of NT$771.8m and NT$1.92m worth of receivables due within a year. So it actually has NT$196.7m more liquid assets than total liabilities.

Having regard to Tanvex BioPharma's size, it seems that its liquid assets are well balanced with its total liabilities. So it's very unlikely that the NT$21.0b company is short on cash, but still worth keeping an eye on the balance sheet. Simply put, the fact that Tanvex BioPharma 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 Tanvex BioPharma 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.

Given its lack of meaningful operating revenue, Tanvex BioPharma shareholders no doubt hope it can fund itself until it has a profitable product.

So How Risky Is Tanvex BioPharma?

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 Tanvex BioPharma lost money at the earnings before interest and tax (EBIT) line. Indeed, in that time it burnt through NT$1.9b of cash and made a loss of NT$2.2b. With only NT$678.5m on the balance sheet, it would appear that its going to need to raise capital again soon. Even though its balance sheet seems sufficiently liquid, debt always makes us a little nervous if a company doesn't produce free cash flow regularly. 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. To that end, you should learn about the 5 warning signs we've spotted with Tanvex BioPharma (including 2 which are potentially serious) .

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.

When trading Tanvex BioPharma or any other investment, use the platform considered by many to be the Professional's Gateway to the Worlds Market, Interactive Brokers. You get the lowest-cost* trading on stocks, options, futures, forex, bonds and funds worldwide from a single integrated account. Promoted

This article by Simply Wall St is general in nature. 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.
^*Interactive Brokers Rated Lowest Cost Broker by StockBrokers.com Annual Online Review 2020

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