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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. 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 XOMA Corporation (NASDAQ:XOMA) does use debt in its business. But is this debt a concern to shareholders?
Why Does Debt Bring Risk?
Debt is a tool to help businesses grow, but if a business is incapable of paying off its lenders, then it exists at their mercy. In the worst case scenario, a company can go bankrupt if it cannot pay its creditors. However, a more usual (but still expensive) situation is where a company must dilute shareholders at a cheap share price simply to get debt under control. Of course, plenty of companies use debt to fund growth, without any negative consequences. When we examine debt levels, we first consider both cash and debt levels, together.
What Is XOMA's Net Debt?
As you can see below, at the end of December 2019, XOMA had US$32.3m of debt, up from US$22.5m a year ago. Click the image for more detail. But it also has US$56.7m in cash to offset that, meaning it has US$24.4m 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$8.88m due within 12 months and liabilities of US$42.9m due beyond that. Offsetting these obligations, it had cash of US$56.7m as well as receivables valued at US$2.93m due within 12 months. So it can boast US$7.89m more liquid assets than total liabilities.
This short term liquidity is a sign that XOMA could probably pay off its debt with ease, as its balance sheet is far from stretched. Simply put, the fact that XOMA has more cash than debt is arguably a good indication that it can manage its debt safely. When analysing debt levels, the balance sheet is the obvious place to start. But ultimately the future profitability of the business will decide if XOMA 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.
Over 12 months, XOMA reported revenue of US$18m, which is a gain of 247%, although it did not report any earnings before interest and tax. When it comes to revenue growth, that's like nailing the game winning 3-pointer!
So How Risky Is XOMA?
Statistically speaking companies that lose money are riskier than those that make money. And we do note that XOMA had negative earnings before interest and tax (EBIT), over the last year. Indeed, in that time it burnt through US$20m of cash and made a loss of US$2.0m. While this does make the company a bit risky, it's important to remember it has net cash of US$24.4m. That kitty means the company can keep spending for growth for at least two years, at current rates. Importantly, XOMA's revenue growth is hot to trot. While unprofitable companies can be risky, they can also grow hard and fast in those pre-profit years. When analysing debt levels, the balance sheet is the obvious place to start. However, not all investment risk resides within the balance sheet - far from it. Take risks, for example - XOMA has 2 warning signs we think you should be aware of.
If, after all that, you're more interested in a fast growing company with a rock-solid balance sheet, then check out our list of net cash growth stocks without delay.
If you spot an error that warrants correction, please contact the editor at email@example.com. 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. Simply Wall St has no position in the stocks mentioned.
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