Is CARsgen Therapeutics Holdings (HKG:2171) Weighed On By Its Debt Load?

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.' It's only natural to consider a company's balance sheet when you examine how risky it is, since debt is often involved when a business collapses. We can see that CARsgen Therapeutics Holdings Limited (HKG:2171) does use debt in its business. But is this debt a concern to shareholders?

What Risk Does Debt Bring?

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. Ultimately, if the company can't fulfill its legal obligations to repay debt, shareholders could walk away with nothing. While that is not too common, we often do see indebted companies permanently diluting shareholders because lenders force them to raise capital at a distressed price. Having said that, the most common situation is where a company manages its debt reasonably well - and to its own advantage. The first step when considering a company's debt levels is to consider its cash and debt together.

Check out our latest analysis for CARsgen Therapeutics Holdings

What Is CARsgen Therapeutics Holdings's Net Debt?

You can click the graphic below for the historical numbers, but it shows that as of June 2024 CARsgen Therapeutics Holdings had CN¥129.1m of debt, an increase on CN¥4.98m, over one year. But on the other hand it also has CN¥1.65b in cash, leading to a CN¥1.52b net cash position.

A Look At CARsgen Therapeutics Holdings' Liabilities

According to the last reported balance sheet, CARsgen Therapeutics Holdings had liabilities of CN¥183.7m due within 12 months, and liabilities of CN¥421.5m due beyond 12 months. Offsetting this, it had CN¥1.65b in cash and CN¥23.4m in receivables that were due within 12 months. So it actually has CN¥1.07b more liquid assets than total liabilities.

This surplus liquidity suggests that CARsgen Therapeutics Holdings' 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 CARsgen Therapeutics Holdings 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 CARsgen Therapeutics Holdings 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.

While it hasn't made a profit, at least CARsgen Therapeutics Holdings booked its first revenue as a publicly listed company, in the last twelve months.

So How Risky Is CARsgen Therapeutics Holdings?

By their very nature companies that are losing money are more risky than those with a long history of profitability. And the fact is that over the last twelve months CARsgen Therapeutics Holdings lost money at the earnings before interest and tax (EBIT) line. And over the same period it saw negative free cash outflow of CN¥575m and booked a CN¥695m accounting loss. But the saving grace is the CN¥1.52b 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. We've identified 3 warning signs with CARsgen Therapeutics Holdings (at least 2 which are a bit concerning) , and understanding them should be part of your investment process.

At the end of the day, it's often better to focus on companies that are free from net debt. You can access our special list of such companies (all with a track record of profit growth). It's free.

Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team (at) simplywallst.com.

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.