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Legendary fund manager Li Lu (who Charlie Munger backed) once said, 'The biggest investment risk is not the volatility of prices, but whether you will suffer a permanent loss of capital.' 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 Alpine Immune Sciences, Inc. (NASDAQ:ALPN) does use debt in its business. But should shareholders be worried about its use of debt?
Why Does Debt Bring Risk?
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. 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 Alpine Immune Sciences's Net Debt?
As you can see below, at the end of December 2020, Alpine Immune Sciences had US$10.1m of debt, up from US$4.93m a year ago. Click the image for more detail. However, it does have US$105.6m in cash offsetting this, leading to net cash of US$95.5m.
A Look At Alpine Immune Sciences' Liabilities
According to the last reported balance sheet, Alpine Immune Sciences had liabilities of US$41.2m due within 12 months, and liabilities of US$40.8m due beyond 12 months. Offsetting these obligations, it had cash of US$105.6m as well as receivables valued at US$388.0k due within 12 months. So it can boast US$24.0m more liquid assets than total liabilities.
This short term liquidity is a sign that Alpine Immune Sciences could probably pay off its debt with ease, as its balance sheet is far from stretched. Succinctly put, Alpine Immune Sciences boasts net cash, so it's fair to say it does not have a heavy debt load! There's no doubt that we learn most about debt from the balance sheet. But it is future earnings, more than anything, that will determine Alpine Immune Sciences's ability to maintain a healthy balance sheet going forward. So if you're focused on the future you can check out this free report showing analyst profit forecasts.
Over 12 months, Alpine Immune Sciences reported revenue of US$9.3m, which is a gain of 433%, although it did not report any earnings before interest and tax. That's virtually the hole-in-one of revenue growth!
So How Risky Is Alpine Immune Sciences?
While Alpine Immune Sciences lost money on an earnings before interest and tax (EBIT) level, it actually generated positive free cash flow US$29m. So although it is loss-making, it doesn't seem to have too much near-term balance sheet risk, keeping in mind the net cash. Keeping in mind its 433% revenue growth over the last year, we think there's a decent chance the company is on track. We'd see further strong growth as an optimistic indication. 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 example Alpine Immune Sciences has 4 warning signs (and 1 which is concerning) we think you should know about.
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.
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. 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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