Howard Marks put it nicely when he said that, rather than worrying about share price volatility, 'The possibility of permanent loss is the risk I worry about... and every practical investor I know worries about.' 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. We can see that Exicure, Inc. (NASDAQ:XCUR) does use debt in its business. But the more important question is: how much risk is that debt creating?
When Is Debt A Problem?
Generally speaking, debt only becomes a real problem when a company can't easily pay it off, either by raising capital or with its own cash flow. Part and parcel of capitalism is the process of 'creative destruction' where failed businesses are mercilessly liquidated by their bankers. 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. Of course, debt can be an important tool in businesses, particularly capital heavy businesses. The first step when considering a company's debt levels is to consider its cash and debt together.
What Is Exicure's Debt?
As you can see below, Exicure had US$4.81m of debt, at March 2019, which is about the same the year before. You can click the chart for greater detail. However, its balance sheet shows it holds US$22.2m in cash, so it actually has US$17.4m net cash.
A Look At Exicure's Liabilities
We can see from the most recent balance sheet that Exicure had liabilities of US$8.22m falling due within a year, and liabilities of US$808.0k due beyond that. Offsetting this, it had US$22.2m in cash and US$6.0k in receivables that were due within 12 months. So it can boast US$13.2m more liquid assets than total liabilities.
This surplus suggests that Exicure has a conservative balance sheet, and could probably eliminate its debt without much difficulty. Succinctly put, Exicure 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 ultimately the future profitability of the business will decide if Exicure can strengthen its balance sheet over time. So if you're focused on the future you can check out this free report showing analyst profit forecasts.
Given its lack of meaningful operating revenue, Exicure shareholders no doubt hope it can fund itself until it has a profitable product.
So How Risky Is Exicure?
Statistically speaking companies that lose money are riskier than those that make money. And in the last year Exicure had negative earnings before interest and tax (EBIT), truth be told. Indeed, in that time it burnt through US$19m of cash and made a loss of US$22m. But at least it has US$22m on the balance sheet to spend on growth, near-term. 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 Exicure insider transactions.
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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