Is Kura Oncology (NASDAQ:KURA) Using Debt Sensibly?

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. Importantly, Kura Oncology, Inc. (NASDAQ:KURA) does carry debt. But the real question is whether this debt is making the company risky.

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. In the worst case scenario, a company can go bankrupt if it cannot pay its creditors. However, a more frequent (but still costly) occurrence is where a company must issue shares at bargain-basement prices, permanently diluting shareholders, just to shore up its balance sheet. Of course, debt can be an important tool in businesses, particularly capital heavy businesses. 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 Kura Oncology

How Much Debt Does Kura Oncology Carry?

The image below, which you can click on for greater detail, shows that at December 2022 Kura Oncology had debt of US$9.16m, up from none in one year. However, its balance sheet shows it holds US$438.0m in cash, so it actually has US$428.8m net cash.

A Look At Kura Oncology's Liabilities

Zooming in on the latest balance sheet data, we can see that Kura Oncology had liabilities of US$24.1m due within 12 months and liabilities of US$12.0m due beyond that. Offsetting these obligations, it had cash of US$438.0m as well as receivables valued at US$900.0k due within 12 months. So it actually has US$402.9m more liquid assets than total liabilities.

This excess liquidity is a great indication that Kura Oncology's balance sheet is almost as strong as Fort Knox. On this view, lenders should feel as safe as the beloved of a black-belt karate master. Simply put, the fact that Kura Oncology 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 Kura Oncology'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 Kura Oncology 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 Kura Oncology?

By their very nature companies that are losing money are more risky than those with a long history of profitability. And in the last year Kura Oncology had an earnings before interest and tax (EBIT) loss, truth be told. Indeed, in that time it burnt through US$111m of cash and made a loss of US$136m. But the saving grace is the US$428.8m on the balance sheet. That kitty means the company can keep spending for growth for at least two years, at current rates. 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. When analysing debt levels, the balance sheet is the obvious place to start. However, not all investment risk resides within the balance sheet - far from it. We've identified 4 warning signs with Kura Oncology (at least 1 which can't be ignored) , and understanding them should be part of your investment process.

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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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.