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 might be obvious that you need to consider debt, when you think about how risky any given stock is, because too much debt can sink a company. Importantly, CARsgen Therapeutics Holdings Limited (HKG:2171) does carry debt. But the real question is whether this debt is making the company risky.

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. 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. 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.

What Is CARsgen Therapeutics Holdings's Debt?

As you can see below, at the end of June 2024, CARsgen Therapeutics Holdings had CN¥129.1m of debt, up from CN¥4.98m a year ago. Click the image for more detail. But it also has CN¥1.65b in cash to offset that, meaning it has CN¥1.52b net cash.

How Healthy Is CARsgen Therapeutics Holdings' Balance Sheet?

We can see from the most recent balance sheet that CARsgen Therapeutics Holdings had liabilities of CN¥183.7m falling due within a year, and liabilities of CN¥421.5m due beyond that. 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 excess liquidity is a great indication that CARsgen Therapeutics Holdings' balance sheet is almost as strong as Fort Knox. Having regard to this fact, we think its balance sheet is as strong as an ox. 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. There's no doubt that we learn most about debt from the balance sheet. But ultimately the future profitability of the business will decide if CARsgen Therapeutics Holdings 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.

In the last year CARsgen Therapeutics Holdings 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 CARsgen Therapeutics Holdings?

Statistically speaking companies that lose money are riskier than those that make money. And we do note that CARsgen Therapeutics Holdings had an earnings before interest and tax (EBIT) loss, over the last year. Indeed, in that time it burnt through CN¥575m of cash and made a loss of CN¥695m. But the saving grace is the CN¥1.52b 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. However, not all investment risk resides within the balance sheet - far from it. For instance, we've identified 3 warning signs for CARsgen Therapeutics Holdings (1 is a bit unpleasant) you should be aware of.

When all is said and done, sometimes its easier to focus on companies that don't even need debt. Readers can access a list of growth stocks with zero net debt 100% free, right now.

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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.