Is Skye Bioscience (NASDAQ:SKYE) Using Debt In A Risky Way?

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.' 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. As with many other companies Skye Bioscience, Inc. (NASDAQ:SKYE) makes use of debt. But is this debt a concern to shareholders?

When Is Debt A Problem?

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. If things get really bad, the lenders can take control of the business. 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. 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 Skye Bioscience

How Much Debt Does Skye Bioscience Carry?

The image below, which you can click on for greater detail, shows that at June 2024 Skye Bioscience had debt of US$4.86m, up from US$90.6k in one year. However, it does have US$74.1m in cash offsetting this, leading to net cash of US$69.3m.

A Look At Skye Bioscience's Liabilities

The latest balance sheet data shows that Skye Bioscience had liabilities of US$14.3m due within a year, and liabilities of US$129.9k falling due after that. On the other hand, it had cash of US$74.1m and US$548.7k worth of receivables due within a year. So it actually has US$60.2m more liquid assets than total liabilities.

This surplus liquidity suggests that Skye Bioscience's balance sheet could take a hit just as well as Homer Simpson's head can take a punch. With this in mind one could posit that its balance sheet means the company is able to handle some adversity. Simply put, the fact that Skye Bioscience 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 Skye Bioscience can strengthen its balance sheet over time. So if you want to see what the professionals think, you might find this free report on analyst profit forecasts to be interesting.

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

So How Risky Is Skye Bioscience?

We have no doubt that loss making companies are, in general, riskier than profitable ones. And we do note that Skye Bioscience had an earnings before interest and tax (EBIT) loss, over the last year. Indeed, in that time it burnt through US$20m of cash and made a loss of US$42m. But the saving grace is the US$69.3m on the balance sheet. That means it could keep spending at its current rate for more than two years. 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. The balance sheet is clearly the area to focus on when you are analysing debt. However, not all investment risk resides within the balance sheet - far from it. These risks can be hard to spot. Every company has them, and we've spotted 5 warning signs for Skye Bioscience (of which 3 are significant!) you should know about.

If, after all that, you're more interested in a fast growing company with a rock-solid balance sheet, then check out our list of net cash growth stocks without delay.

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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.