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.' When we think about how risky a company is, we always like to look at its use of debt, since debt overload can lead to ruin. We note that Agenus Inc. (NASDAQ:AGEN) does have debt on its balance sheet. But the real question is whether this debt is making the company risky.
What Risk Does Debt Bring?
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. In the worst case scenario, a company can go bankrupt if it cannot pay its creditors. However, a more frequent (but still costly) occurrence is where a company must issue shares at bargain-basement prices, permanently diluting shareholders, just to shore up its balance sheet. Of course, plenty of companies use debt to fund growth, without any negative consequences. When we think about a company's use of debt, we first look at cash and debt together.
What Is Agenus's Net Debt?
The image below, which you can click on for greater detail, shows that Agenus had debt of US$14.2m at the end of March 2022, a reduction from US$20.4m over a year. However, it does have US$262.7m in cash offsetting this, leading to net cash of US$248.5m.
How Strong Is Agenus' Balance Sheet?
The latest balance sheet data shows that Agenus had liabilities of US$163.1m due within a year, and liabilities of US$250.6m falling due after that. Offsetting these obligations, it had cash of US$262.7m as well as receivables valued at US$1.29m due within 12 months. So it has liabilities totalling US$149.7m more than its cash and near-term receivables, combined.
Agenus has a market capitalization of US$433.6m, so it could very likely raise cash to ameliorate its balance sheet, if the need arose. But we definitely want to keep our eyes open to indications that its debt is bringing too much risk. Despite its noteworthy liabilities, Agenus boasts net cash, so it's fair to say it does not have a heavy debt load!
Notably, Agenus made a loss at the EBIT level, last year, but improved that to positive EBIT of US$44m in the last twelve months. When analysing debt levels, the balance sheet is the obvious place to start. But it is future earnings, more than anything, that will determine Agenus'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.
Finally, a company can only pay off debt with cold hard cash, not accounting profits. Agenus may have net cash on the balance sheet, but it is still interesting to look at how well the business converts its earnings before interest and tax (EBIT) to free cash flow, because that will influence both its need for, and its capacity to manage debt. Over the last year, Agenus saw substantial negative free cash flow, in total. While that may be a result of expenditure for growth, it does make the debt far more risky.
Although Agenus's balance sheet isn't particularly strong, due to the total liabilities, it is clearly positive to see that it has net cash of US$248.5m. Despite the cash, we do find Agenus's conversion of EBIT to free cash flow concerning, so we're not particularly comfortable with the stock. When analysing debt levels, the balance sheet is the obvious place to start. But ultimately, every company can contain risks that exist outside of the balance sheet. To that end, you should be aware of the 3 warning signs we've spotted with Agenus .
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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