Howard Marks put it nicely when he said that, rather than worrying about stock price volatility, “the possibility of permanent loss is the risk I worry about…and every practical investor I know, is worried.’ So it may be obvious that you need to factor in debt when you consider how risky a particular stock is, as too much debt can sink a company. We note that Humanigen, Inc. (NASDAQ:HGEN) has debts on its balance sheet. But should shareholders be concerned about using debt?
Why does debt involve risks?
In general, debt only becomes a real problem if a company cannot easily pay it off, either by raising capital or using its own cash flow. When things go really bad, the lenders can take control of the company. However, a more frequent (but still costly) event is a company having to issue shares at spot prices, permanently diluting shareholders, just to bolster its balance sheet. Debt can, of course, be an important tool in companies, especially in wealthy companies. The first thing to do when considering how much debt a company uses is to look at its cash and debt together.
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What is Humanigen’s net debt?
You can click the image below for the historical numbers, but it shows Humanigen had $24.4 million in debt in March 2021, up from $7.32 million, over a year. However, the balance sheet shows that it holds US$92.9 million in cash, so it actually has US$68.4 million in net cash.
A look at Humanigen’s obligations
The most recent balance sheet data shows that Humanigen was in debt of $53.3 million within a year, and $28.6 million thereafter. To offset these obligations, the company had $92.9 million in cash and $5.01 million receivables payable within 12 months. So it actually has US$16.1 million more liquid assets than total liabilities.
Given Humanigen’s size, it appears that its liquid assets are well balanced against its total liabilities. So it’s highly unlikely that the $1.03 billion company will be short of cash, but it’s worth keeping an eye on its balance sheet nonetheless. Simply put, the fact that Humanigen has more cash than debt is arguably a good indication that it can safely manage its debt. There is no doubt that we learn the most about debt from the balance sheet. But it is mainly future income that determines Humanigen’s ability to maintain a healthy balance sheet in the future. So if you want to see what the pros think, you might find this free analyst earnings forecast report be interesting.
In the past year, Humanigen managed to generate its first turnover as a publicly traded company, but given the lack of profits, shareholders will undoubtedly hope for strong increases.
So how risky is Humanigen?
Statistically, companies that lose money are more risky than companies that make money. And in the past year, Humanigen had a profit before interest and tax (EBIT) loss, frankly. And over the same period, it saw a negative free cash outflow of $105 million and recorded an accounting loss of $153 million. Since the company has only $68.4 million net, it may need to raise more capital if it doesn’t reach breakeven soon. The good news for shareholders is that Humanigen has staggering revenue growth, so there’s a good chance it can boost its free cash flow for years to come. While unprofitable companies can be risky, they can also grow hard and fast in those pre-profit years. There is no doubt that we learn the most about debt from the balance sheet. But in the end, any business can contain risks that exist off-balance sheet. For example, we have established: 6 warning signs for Humanigen (2 doesn’t sit well with us) you should be aware.
At the end of the day, it’s often better to focus on companies that are free of net debt. You can access our special list of such companies (all with a track record of earnings growth). It is free.
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This article from Simply Wall St is general in nature. It is not a recommendation to buy or sell stocks and does not take into account your objectives or your financial situation. We strive to provide you with long-term focused analysis powered by fundamental data. Please note that our analysis may not take into account the latest price-sensitive company announcements or quality material. Simply Wall St has no position in said stocks.
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