Does Tanvex BioPharma (TWSE:6541) Have A Healthy Balance Sheet?

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 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. We can see that Tanvex BioPharma, Inc. (TWSE:6541) does use debt in its business. But the real question is whether this debt is making the company risky.

When Is Debt A Problem?

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 common (but still painful) scenario is that it has to raise new equity capital at a low price, thus permanently diluting shareholders. 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. When we think about a company's use of debt, we first look at cash and debt together.

View our latest analysis for Tanvex BioPharma

How Much Debt Does Tanvex BioPharma Carry?

As you can see below, at the end of March 2024, Tanvex BioPharma had NT$375.0m of debt, up from none a year ago. Click the image for more detail. However, its balance sheet shows it holds NT$385.2m in cash, so it actually has NT$10.2m net cash.

How Strong Is Tanvex BioPharma's Balance Sheet?

The latest balance sheet data shows that Tanvex BioPharma had liabilities of NT$760.4m due within a year, and liabilities of NT$1.60b falling due after that. Offsetting these obligations, it had cash of NT$385.2m as well as receivables valued at NT$36.3m due within 12 months. So it has liabilities totalling NT$1.94b more than its cash and near-term receivables, combined.

This deficit isn't so bad because Tanvex BioPharma is worth NT$7.71b, and thus could probably raise enough capital to shore up its balance sheet, if the need arose. However, it is still worthwhile taking a close look at its ability to pay off debt. Despite its noteworthy liabilities, Tanvex BioPharma boasts net cash, so it's fair to say it does not have a heavy debt load! When analysing debt levels, the balance sheet is the obvious place to start. But you can't view debt in total isolation; since Tanvex BioPharma will need earnings to service that debt. So if you're keen to discover more about its earnings, it might be worth checking out this graph of its long term earnings trend.

Over 12 months, Tanvex BioPharma made a loss at the EBIT level, and saw its revenue drop to NT$35m, which is a fall of 30%. That makes us nervous, to say the least.

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 we do note that Tanvex BioPharma 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 NT$1.5b and booked a NT$1.9b accounting loss. Given it only has net cash of NT$10.2m, the company may need to raise more capital if it doesn't reach break-even soon. Summing up, we're a little skeptical of this one, as it seems fairly risky in the absence of free cashflow. 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. For example, we've discovered 3 warning signs for Tanvex BioPharma (1 can't be ignored!) that you should be aware of before investing here.

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.

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