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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.' It's only natural to consider a company's balance sheet when you examine how risky it is, since debt is often involved when a business collapses. Importantly, ImmuPharma plc (LON:IMM) does carry debt. But is this debt a concern to shareholders?
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. Part and parcel of capitalism is the process of 'creative destruction' where failed businesses are mercilessly liquidated by their bankers. 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. 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 think about a company's use of debt, we first look at cash and debt together.
How Much Debt Does ImmuPharma Carry?
As you can see below, at the end of June 2020, ImmuPharma had UK£1.87m of debt, up from UK£97.0k a year ago. Click the image for more detail. But on the other hand it also has UK£2.71m in cash, leading to a UK£848.1k net cash position.
How Strong Is ImmuPharma's Balance Sheet?
The latest balance sheet data shows that ImmuPharma had liabilities of UK£504.6k due within a year, and liabilities of UK£1.60m falling due after that. Offsetting this, it had UK£2.71m in cash and UK£310.0k in receivables that were due within 12 months. So it can boast UK£920.5k more liquid assets than total liabilities.
This surplus suggests that ImmuPharma has a conservative balance sheet, and could probably eliminate its debt without much difficulty. Simply put, the fact that ImmuPharma has more cash than debt is arguably a good indication that it can manage its debt safely. The balance sheet is clearly the area to focus on when you are analysing debt. But ultimately the future profitability of the business will decide if ImmuPharma can strengthen its balance sheet over time. So if you want to see what the professionals think, you might find this free report on analyst profit forecasts to be interesting.
It seems likely shareholders hope that ImmuPharma can significantly advance the business plan before too long, because it doesn't have any significant revenue at the moment.
So How Risky Is ImmuPharma?
Statistically speaking companies that lose money are riskier than those that make money. And we do note that ImmuPharma had an earnings before interest and tax (EBIT) loss, over the last year. Indeed, in that time it burnt through UK£3.2m of cash and made a loss of UK£5.2m. Given it only has net cash of UK£848.1k, the company may need to raise more capital if it doesn't reach break-even soon. Importantly, ImmuPharma's revenue growth is hot to trot. High growth pre-profit companies may well be risky, but they can also offer great rewards. 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. Consider for instance, the ever-present spectre of investment risk. We've identified 6 warning signs with ImmuPharma (at least 2 which make us uncomfortable) , and understanding them should be part of your investment process.
At the end of the day, it's often better to focus on companies that are free from net debt. You can access our special list of such companies (all with a track record of profit growth). It's free.
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. We aim to bring you long-term focused analysis driven by fundamental data. Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative material. Simply Wall St has no position in any stocks mentioned.
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