Is Skye Bioscience (NASDAQ:SKYE) using debt in a risky way?

Howard Marks put it nicely when he said, “The possibility of permanent loss is the risk that worries me… and that worries every practical investor I know.” When we think about how risky a company is, we always like to look at its level of debt, since excessive debt can lead to ruin. As with many other companies Skye Bioscience, Inc. (NASDAQ:SKYE) is taking on debt. But is this debt a cause for concern for shareholders?

When is debt a problem?

Debt is a tool to help companies grow, but if a company is unable to repay its lenders, it is at their mercy. If things go really bad, lenders can take control of the company. However, a more common (but still costly) case is that a company must issue shares at bargain prices, permanently diluting shareholders’ ownership, just to shore up its balance sheet. By replacing dilution, however, debt can be an extremely good tool for companies that need capital to invest in growth with high returns. When we think about a company’s use of debt, we first consider cash and debt together.

Check out our latest analysis for Skye Bioscience

How much debt does Skye Bioscience have?

The image below, which you can click on for more details, shows that Skye Bioscience had $4.86 million in debt as of June 2024, an increase of $90.6k in one year, but this is offset by $74.1 million in cash, resulting in net cash of $69.3 million.

A look at Skye Bioscience’s liabilities

According to the latest balance sheet data, Skye Bioscience had liabilities of $14.3 million due within a year and accounts payable of $129.9k due after that. On the other hand, the company had cash of $74.1 million and accounts receivable of $548.7k due within a year. So, the company actually has $60.2 million more Liquid assets are greater than total liabilities.

This excess liquidity suggests that Skye Bioscience’s balance sheet could take a hit about as well as Homer Simpson’s head could take a hit. With that in mind, you might assume that the balance sheet means the company is able to weather 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 analyzing debt. But ultimately, the company’s future profitability will determine whether Skye Bioscience can strengthen its balance sheet over time. So if you want to know what the professionals think, you might find this free report on analyst earnings forecasts interesting.

Given the lack of significant operating revenue, Skye Bioscience shareholders are no doubt hoping that the company can finance itself until it has a profitable product.

How risky is Skye Bioscience?

We have no doubt that loss-making companies are generally riskier than profitable ones. And we note that Skye Bioscience posted a loss before interest and taxes (EBIT) last year. In fact, the company burned through $20 million in cash during that time, posting a loss of $42 million. But the saving grace is the $69.3 million on the balance sheet. That means the company could continue spending at current levels for more than two years. Even if the balance sheet appears sufficiently liquid, debt always makes us a little nervous when a company doesn’t generate free cash flow on a regular basis. The balance sheet is clearly the area to focus on when analyzing debt. However, not all investment risks are contained on the balance sheet – quite the opposite. These risks can be difficult to spot. Every company has them, and we have 5 warning signs for Skye Bioscience (3 of which are important!) that you should know.

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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