David Iben put it well when he said, 'Volatility is not a risk we care about. What we care about is avoiding the permanent loss of capital. So it seems the smart money knows that debt - which is usually involved in bankruptcies - is a very important factor, when you assess how risky a company is. We can see that RavenQuest BioMed Inc. (CNSX:RQB) does use debt in its business. But the more important question is: how much risk is that debt creating?
When Is Debt A Problem?
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. In the worst case scenario, a company can go bankrupt if it cannot pay its creditors. However, a more usual (but still expensive) situation is where a company must dilute shareholders at a cheap share price simply to get debt under control. Of course, debt can be an important tool in businesses, particularly capital heavy businesses. When we examine debt levels, we first consider both cash and debt levels, together.
How Much Debt Does RavenQuest BioMed Carry?
The image below, which you can click on for greater detail, shows that at July 2019 RavenQuest BioMed had debt of CA$14.8m, up from CA$12.5m in one year. However, it also had CA$749.1k in cash, and so its net debt is CA$14.0m.
How Healthy Is RavenQuest BioMed's Balance Sheet?
The latest balance sheet data shows that RavenQuest BioMed had liabilities of CA$5.63m due within a year, and liabilities of CA$13.3m falling due after that. Offsetting these obligations, it had cash of CA$749.1k as well as receivables valued at CA$915.3k due within 12 months. So it has liabilities totalling CA$17.3m more than its cash and near-term receivables, combined.
This is a mountain of leverage relative to its market capitalization of CA$24.8m. Should its lenders demand that it shore up the balance sheet, shareholders would likely face severe dilution. When analysing debt levels, the balance sheet is the obvious place to start. But it is RavenQuest BioMed's earnings that will influence how the balance sheet holds up in the future. So when considering debt, it's definitely worth looking at the earnings trend. Click here for an interactive snapshot.
Over 12 months, RavenQuest BioMed saw its revenue hold pretty steady, and it did not report positive earnings before interest and tax. While that's not too bad, we'd prefer see growth.
Over the last twelve months RavenQuest BioMed produced an earnings before interest and tax (EBIT) loss. Its EBIT loss was a whopping CA$14m. Considering that alongside the liabilities mentioned above does not give us much confidence that company should be using so much debt. Quite frankly we think the balance sheet is far from match-fit, although it could be improved with time. Another cause for caution is that is bled CA$8.1m in negative free cash flow over the last twelve months. So in short it's a really risky stock. When I consider a company to be a bit risky, I think it is responsible to check out whether insiders have been reporting any share sales. Luckily, you can click here ito see our graphic depicting RavenQuest BioMed insider transactions.
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.
We aim to bring you long-term focused research analysis driven by fundamental data. Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative material.
If you spot an error that warrants correction, please contact the editor at email@example.com. 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.