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Inovio Pharmaceuticals (NASDAQ:INO) Is Using Debt Safely

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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.' When we think about how risky a company is, we always like to look at its use of debt, since debt overload can lead to ruin. We can see that Inovio Pharmaceuticals, Inc. ( NASDAQ:INO ) does use debt in its business. But the more important question is: how much risk is that debt creating?

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. Ultimately, if the company can't fulfill its legal obligations to repay debt, shareholders could walk away with nothing. However, a more frequent (but still costly) occurrence is where a company must issue shares at bargain-basement prices, permanently diluting shareholders, just to shore up its balance sheet. 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. The first step when considering a company's debt levels is to consider its cash and debt together.

See our latest analysis for Inovio Pharmaceuticals

What Is Inovio Pharmaceuticals's Net Debt?

The image below, which you can click on for greater detail, shows that Inovio Pharmaceuticals had debt of US$14.5m at the end of September 2021, a reduction from US$53.7m over a year. However, its balance sheet shows it holds US$394.9m in cash, so it actually has US$380.5m net cash.

debt-equity-history-analysis
debt-equity-history-analysis

A Look At Inovio Pharmaceuticals' Liabilities

We can see from the most recent balance sheet that Inovio Pharmaceuticals had liabilities of US$51.4m falling due within a year, and liabilities of US$30.8m due beyond that. On the other hand, it had cash of US$394.9m and US$7.13m worth of receivables due within a year. So it can boast US$319.9m more liquid assets than total liabilities.

It's good to see that Inovio Pharmaceuticals has plenty of liquidity on its balance sheet, suggesting conservative management of liabilities. Given it has easily adequate short term liquidity, we don't think it will have any issues with its lenders. Succinctly put, Inovio Pharmaceuticals 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 ultimately the future profitability of the business will decide if Inovio Pharmaceuticals 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.

Over 12 months, Inovio Pharmaceuticals reported revenue of US$6.5m, although it did not report any earnings before interest and tax.

So How Risky Is Inovio Pharmaceuticals?

By their very nature companies that are losing money are more risky than those with a long history of profitability. And the fact is that over the last twelve months Inovio Pharmaceuticals lost money at the earnings before interest and tax (EBIT) line. And over the same period it saw negative free cash outflow of US$231m and booked a US$221m accounting loss. While this does make the company a bit risky, it's important to remember it has net cash of US$380.5m. That kitty means the company can keep spending for growth for at least two years, at current rates. 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. But ultimately, every company can contain risks that exist outside of the balance sheet. These risks can be hard to spot. Every company has them, and we've spotted 2 warning signs for Inovio Pharmaceuticals you should know about.

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.

Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team (at) simplywallst.com.

This article by Simply Wall St is general in nature. We provide commentary based on historical data and analyst forecasts only using an unbiased methodology and our articles are not intended to be financial advice. 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.