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.' 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. Importantly, Kura Oncology, Inc. (NASDAQ:KURA) does carry debt. But should shareholders be worried about its use of debt?
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. If things get really bad, the lenders can take control of the business. 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. 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. The first step when considering a company's debt levels is to consider its cash and debt together.
What Is Kura Oncology's Net Debt?
The chart below, which you can click on for greater detail, shows that Kura Oncology had US$9.38m in debt in March 2024; about the same as the year before. However, it does have US$527.1m in cash offsetting this, leading to net cash of US$517.7m.
How Healthy Is Kura Oncology's Balance Sheet?
The latest balance sheet data shows that Kura Oncology had liabilities of US$32.3m due within a year, and liabilities of US$16.6m falling due after that. Offsetting this, it had US$527.1m in cash and US$4.30m in receivables that were due within 12 months. So it can boast US$482.6m more liquid assets than total liabilities.
This surplus suggests that Kura Oncology is using debt in a way that is appears to be both safe and conservative. Given it has easily adequate short term liquidity, we don't think it will have any issues with its lenders. Succinctly put, Kura Oncology boasts net cash, so it's fair to say it does not have a heavy debt load! When analysing debt levels, the balance sheet is the obvious place to start. But it is future earnings, more than anything, that will determine Kura Oncology'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.
Since Kura Oncology doesn't have significant operating revenue, shareholders may be hoping it comes up with a great new product, before it runs out of money.
So How Risky Is Kura Oncology?
We have no doubt that loss making companies are, in general, riskier than profitable ones. And the fact is that over the last twelve months Kura Oncology lost money at the earnings before interest and tax (EBIT) line. And over the same period it saw negative free cash outflow of US$138m and booked a US$168m accounting loss. But the saving grace is the US$517.7m 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. There's no doubt that we learn most about debt from the balance sheet. But ultimately, every company can contain risks that exist outside of the balance sheet. For instance, we've identified 3 warning signs for Kura Oncology (1 is potentially serious) you should be aware of.
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.
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