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.' 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 note that XOMA Corporation (NASDAQ:XOMA) does have debt on its balance sheet. But is this debt a concern to shareholders?
What Risk Does Debt Bring?
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. In the worst case scenario, a company can go bankrupt if it cannot pay its creditors. 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 XOMA's Debt?
The image below, which you can click on for greater detail, shows that at June 2019 XOMA had debt of US$26.0m, up from US$14.9m in one year. However, its balance sheet shows it holds US$42.3m in cash, so it actually has US$16.3m net cash.
How Strong Is XOMA's Balance Sheet?
Zooming in on the latest balance sheet data, we can see that XOMA had liabilities of US$11.7m due within 12 months and liabilities of US$45.7m due beyond that. Offsetting this, it had US$42.3m in cash and US$2.58m in receivables that were due within 12 months. So its liabilities total US$12.4m more than the combination of its cash and short-term receivables.
Since publicly traded XOMA shares are worth a total of US$140.4m, it seems unlikely that this level of liabilities would be a major threat. But there are sufficient liabilities that we would certainly recommend shareholders continue to monitor the balance sheet, going forward. Despite its noteworthy liabilities, XOMA boasts net cash, so it's fair to say it does not have a heavy debt load! When analysing debt levels, the balance sheet is the obvious place to start. But it is future earnings, more than anything, that will determine XOMA'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 XOMA actually shrunk its revenue by 74%, to US$12m. To be frank that doesn't bode well.
So How Risky Is XOMA?
We have no doubt that loss making companies are, in general, riskier than profitable ones. And in the last year XOMA had negative earnings before interest and tax (EBIT), truth be told. Indeed, in that time it burnt through US$21m of cash and made a loss of US$8.4m. However, it has net cash of US$42m, so it has a bit of time before it will need more capital. Summing up, we're a little skeptical of this one, as it seems fairly risky in the absence of free cashflow. For riskier companies like XOMA I always like to keep an eye on the long term profit and revenue trends. Fortunately, you can click to see our interactive graph of its profit, revenue, and operating cashflow.
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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