The external fund manager backed by Berkshire Hathaway's Charlie Munger, Li Lu, makes no bones about it when he says 'The biggest investment risk is not the volatility of prices, but whether you will suffer a permanent loss of capital.' 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. 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?
When Is Debt Dangerous?
Debt assists a business until the business has trouble paying it off, either with new capital or with free cash flow. If things get really bad, the lenders can take control of the business. However, a more common (but still painful) scenario is that it has to raise new equity capital at a low price, thus permanently diluting shareholders. Of course, the upside of debt is that it often represents cheap capital, especially when it replaces dilution in a company with the ability to reinvest at high rates of return. The first thing to do when considering how much debt a business uses is to look at its cash and debt together.
What Is Alpine Immune Sciences's Net Debt?
The image below, which you can click on for greater detail, shows that Alpine Immune Sciences had debt of US$3.27m at the end of June 2019, a reduction from US$5.12m over a year. However, its balance sheet shows it holds US$55.6m in cash, so it actually has US$52.3m net cash.
A Look At Alpine Immune Sciences's Liabilities
The latest balance sheet data shows that Alpine Immune Sciences had liabilities of US$12.6m due within a year, and liabilities of US$12.1m falling due after that. Offsetting this, it had US$55.6m in cash and US$237.0k in receivables that were due within 12 months. So it can boast US$31.1m more liquid assets than total liabilities.
This surplus liquidity suggests that Alpine Immune Sciences's balance sheet could take a hit just as well as Homer Simpson's head can take a punch. Having regard to this fact, we think its balance sheet is just as strong as misogynists are weak. Simply put, the fact that Alpine Immune Sciences 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 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 want to see what the professionals think, you might find this free report on analyst profit forecasts to be interesting.
In the last year Alpine Immune Sciences actually shrunk its revenue by 41%, to US$567k. That makes us nervous, to say the least.
So How Risky Is Alpine Immune Sciences?
By their very nature companies that are losing money are more risky than those with a long history of profitability. And in the last year Alpine Immune Sciences had negative earnings before interest and tax (EBIT), truth be told. And over the same period it saw negative free cash outflow of US$36m and booked a US$48m accounting loss. However, it has net cash of US$56m, so it has a bit of time before it will need more capital. Overall, its balance sheet doesn't seem overly risky, at the moment, but we're always cautious until we see the positive free cash flow. When I consider a company to be a bit risky, I think it is responsible to check out whether insiders have been reporting any share sales. Luckily, you can click here ito see our graphic depicting Alpine Immune Sciences insider transactions.
Of course, if you're the type of investor who prefers buying stocks without the burden of debt, then don't hesitate to discover our exclusive list of net cash growth stocks, today.
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