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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 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 HOOKIPA Pharma Inc. (NASDAQ:HOOK) 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. Ultimately, if the company can't fulfill its legal obligations to repay debt, shareholders could walk away with nothing. 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. By replacing dilution, though, debt can be an extremely good tool for businesses that need capital to invest in growth at high rates of return. When we examine debt levels, we first consider both cash and debt levels, together.
What Is HOOKIPA Pharma's Net Debt?
As you can see below, at the end of September 2019, HOOKIPA Pharma had US$4.77m of debt, up from US$4.4 a year ago. Click the image for more detail. However, its balance sheet shows it holds US$123.7m in cash, so it actually has US$118.9m net cash.
A Look At HOOKIPA Pharma's Liabilities
The latest balance sheet data shows that HOOKIPA Pharma had liabilities of US$13.0m due within a year, and liabilities of US$13.3m falling due after that. Offsetting these obligations, it had cash of US$123.7m as well as receivables valued at US$1.27m due within 12 months. So it actually has US$98.7m more liquid assets than total liabilities.
This surplus liquidity suggests that HOOKIPA Pharma's balance sheet could take a hit just as well as Homer Simpson's head can take a punch. With this in mind one could posit that its balance sheet is as strong as beautiful a rare rhino. Succinctly put, HOOKIPA Pharma boasts net cash, so it's fair to say it does not have a heavy debt load! The balance sheet is clearly the area to focus on when you are analysing debt. But it is future earnings, more than anything, that will determine HOOKIPA Pharma'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.
In the last year HOOKIPA Pharma's revenue was pretty flat, and it made a negative EBIT. While that hardly impresses, its not too bad either.
So How Risky Is HOOKIPA Pharma?
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 HOOKIPA Pharma had negative earnings before interest and tax (EBIT), truth be told. And over the same period it saw negative free cash outflow of US$41m and booked a US$35m accounting loss. But the saving grace is the US$118.9m on the balance sheet. That means it could keep spending at its current rate for more than two years. 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 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. Take risks, for example - HOOKIPA Pharma has 2 warning signs we think you should be aware of.
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.
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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