Warren Buffett famously said, ‘Volatility is far from synonymous with risk.’ So it might be obvious that you need to consider debt, when you think about how risky any given stock is, because too much debt can sink a company. As with many other companies Alpine Immune Sciences, Inc. (NASDAQ:ALPN) makes use of debt. But should shareholders be worried about its use of debt?
What Risk Does Debt Bring?
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. Part and parcel of capitalism is the process of ‘creative destruction’ where failed businesses are mercilessly liquidated by their bankers. 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, debt can be an important tool in businesses, particularly capital heavy businesses. The first thing to do when considering how much debt a business uses is to look at its cash and debt together.
How Much Debt Does Alpine Immune Sciences Carry?
You can click the graphic below for the historical numbers, but it shows that as of March 2020 Alpine Immune Sciences had US$9.46m of debt, an increase on US$3.74m, over one year. However, its balance sheet shows it holds US$35.7m in cash, so it actually has US$26.2m net cash.
How Strong Is Alpine Immune Sciences’s Balance Sheet?
According to the last reported balance sheet, Alpine Immune Sciences had liabilities of US$5.11m due within 12 months, and liabilities of US$19.9m due beyond 12 months. On the other hand, it had cash of US$35.7m and US$1.04m worth of receivables due within a year. So it actually has US$11.7m more liquid assets than total liabilities.
It’s good to see that Alpine Immune Sciences 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, Alpine Immune Sciences boasts net cash, so it’s fair to say it does not have a heavy debt load! There’s no doubt that we learn most about debt from the balance sheet. But ultimately the future profitability of the business will decide if Alpine Immune Sciences 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, Alpine Immune Sciences reported revenue of US$2.8m, which is a gain of 622%, 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 Alpine Immune Sciences?
Statistically speaking companies that lose money are riskier than those that make money. And in the last year Alpine Immune Sciences had negative earnings before interest and tax (EBIT), truth be told. And over the same period it saw negative free cash outflow of US$35m and booked a US$35m accounting loss. However, it has net cash of US$26.2m, so it has a bit of time before it will need more capital. Importantly, Alpine Immune Sciences’s revenue growth is hot to trot. High growth pre-profit companies may well be risky, but they can also offer great rewards. The balance sheet is clearly the area to focus on when you are analysing debt. 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 5 warning signs with Alpine Immune Sciences (at least 1 which is significant) , 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.
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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. Thank you for reading.