Is Milestone Pharmaceuticals (NASDAQ:MIST) A Risky Investment?

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 Milestone Pharmaceuticals Inc. (NASDAQ:MIST) does use debt in its business. But the more important question is: how much risk is that debt creating?

When Is Debt Dangerous?

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. Ultimately, if the company can't fulfill its legal obligations to repay debt, shareholders could walk away with nothing. 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. Of course, plenty of companies use debt to fund growth, without any negative consequences. The first thing to do when considering how much debt a business uses is to look at its cash and debt together.

Check out our latest analysis for Milestone Pharmaceuticals

How Much Debt Does Milestone Pharmaceuticals Carry?

The image below, which you can click on for greater detail, shows that at June 2023 Milestone Pharmaceuticals had debt of US$48.1m, up from none in one year. However, it does have US$87.6m in cash offsetting this, leading to net cash of US$39.5m.

How Healthy Is Milestone Pharmaceuticals' Balance Sheet?

Zooming in on the latest balance sheet data, we can see that Milestone Pharmaceuticals had liabilities of US$6.81m due within 12 months and liabilities of US$49.8m due beyond that. Offsetting this, it had US$87.6m in cash and US$1.58m in receivables that were due within 12 months. So it can boast US$32.6m more liquid assets than total liabilities.

It's good to see that Milestone Pharmaceuticals has plenty of liquidity on its balance sheet, suggesting conservative management of liabilities. Given it has easily adequate short term liquidity, we don't think it will have any issues with its lenders. Succinctly put, Milestone Pharmaceuticals 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 Milestone Pharmaceuticals'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.

In the last year Milestone Pharmaceuticals managed to produce its first revenue as a listed company, but given the lack of profit, shareholders will no doubt be hoping to see some strong increases.

So How Risky Is Milestone Pharmaceuticals?

Statistically speaking companies that lose money are riskier than those that make money. And we do note that Milestone Pharmaceuticals 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 US$49m and booked a US$59m accounting loss. However, it has net cash of US$39.5m, so it has a bit of time before it will need more capital. 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. To that end, you should be aware of the 2 warning signs we've spotted with Milestone Pharmaceuticals .

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.