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Howard Marks put it nicely when he said that, rather than worrying about share price volatility, ‘The possibility of permanent loss is the risk I worry about… and every practical investor I know worries about.’ 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 Calyxt, Inc. (NASDAQ:CLXT) does use debt in its business. But the real question is whether this debt is making the company risky.
What Risk Does Debt Bring?
Debt assists a business until the business has trouble paying it off, either with new capital or with free cash flow. Ultimately, if the company can’t fulfill its legal obligations to repay debt, shareholders could walk away with nothing. 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. Having said that, the most common situation is where a company manages its debt reasonably well – and to its own advantage. When we examine debt levels, we first consider both cash and debt levels, together.
What Is Calyxt’s Net Debt?
As you can see below, at the end of March 2019, Calyxt had US$18.4m of debt, up from US$15.5m a year ago. Click the image for more detail. But on the other hand it also has US$84.2m in cash, leading to a US$65.8m net cash position.
A Look At Calyxt’s Liabilities
The latest balance sheet data shows that Calyxt had liabilities of US$4.65m due within a year, and liabilities of US$18.3m falling due after that. Offsetting these obligations, it had cash of US$84.2m as well as receivables valued at US$254.0k due within 12 months. So it can boast US$61.5m more liquid assets than total liabilities.
This excess liquidity suggests that Calyxt is taking a careful approach to debt. Due to its strong net asset position, it is not likely to face issues with its lenders. Calyxt boasts net cash, so it’s fair to say it does not have a heavy debt load! The balance sheet is clearly the area to focus on when you are analysing debt. But it is future earnings, more than anything, that will determine Calyxt’s ability to maintain a healthy balance sheet going forward. So if you want to see what the professionals think, you might find this free report on analyst profit forecasts to be interesting.
Since Calyxt 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 Calyxt?
We have no doubt that loss making companies are, in general, riskier than profitable ones. And we do note that Calyxt had negative earnings before interest and tax (EBIT), over the last year. Indeed, in that time it burnt through US$25m of cash and made a loss of US$31m. But the saving grace is the US$84m on the balance sheet. That means it could keep spending at its current rate for more than two years. 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. For riskier companies like Calyxt I always like to keep an eye on whether insiders are buying or selling. So click here if you want to find out for yourself.
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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If you spot an error that warrants correction, please contact the editor at firstname.lastname@example.org. 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. Simply Wall St has no position in the stocks mentioned. Thank you for reading.