Is Kezar Life Sciences (NASDAQ:KZR) Using Too Much Debt?

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.' 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 can see that Kezar Life Sciences, Inc. (NASDAQ:KZR) does use debt in its business. But should shareholders be worried about its use of debt?

Why Does Debt Bring Risk?

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. Part and parcel of capitalism is the process of 'creative destruction' where failed businesses are mercilessly liquidated by their bankers. 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, 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.

Check out our latest analysis for Kezar Life Sciences

What Is Kezar Life Sciences's Debt?

You can click the graphic below for the historical numbers, but it shows that as of March 2022 Kezar Life Sciences had US$13.8m of debt, an increase on none, over one year. However, it does have US$242.6m in cash offsetting this, leading to net cash of US$228.8m.

How Strong Is Kezar Life Sciences' Balance Sheet?

We can see from the most recent balance sheet that Kezar Life Sciences had liabilities of US$6.98m falling due within a year, and liabilities of US$12.6m due beyond that. Offsetting this, it had US$242.6m in cash and US$70.0k in receivables that were due within 12 months. So it can boast US$223.1m more liquid assets than total liabilities.

This surplus liquidity suggests that Kezar Life Sciences' balance sheet could take a hit just as well as Homer Simpson's head can take a punch. On this view, lenders should feel as safe as the beloved of a black-belt karate master. Simply put, the fact that Kezar Life Sciences has more cash than debt is arguably a good indication that it can manage its debt safely. The balance sheet is clearly the area to focus on when you are analysing debt. But ultimately the future profitability of the business will decide if Kezar Life Sciences can strengthen its balance sheet over time. So if you're focused on the future you can check out this free report showing analyst profit forecasts.

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

So How Risky Is Kezar Life Sciences?

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 Kezar Life Sciences had an earnings before interest and tax (EBIT) loss, over the last year. Indeed, in that time it burnt through US$48m of cash and made a loss of US$61m. But the saving grace is the US$228.8m 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. But ultimately, every company can contain risks that exist outside of the balance sheet. For example Kezar Life Sciences has 5 warning signs (and 2 which can't be ignored) we think you should know about.

Of course, if you're the type of investor who prefers buying stocks without the burden of debt, then don't hesitate to discover our exclusive list of net cash growth stocks, today.

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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.