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.' 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. As with many other companies ImmunoPrecise Antibodies Ltd. (CVE:IPA) makes use of debt. But should shareholders be worried about its use of debt?
When Is Debt Dangerous?
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. Of course, the upside of debt is that it often represents cheap capital, especially when it replaces dilution in a company with the ability to reinvest 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 ImmunoPrecise Antibodies Carry?
As you can see below, ImmunoPrecise Antibodies had CA$2.64m of debt at July 2020, down from CA$2.90m a year prior. But it also has CA$6.06m in cash to offset that, meaning it has CA$3.42m net cash.
How Healthy Is ImmunoPrecise Antibodies's Balance Sheet?
The latest balance sheet data shows that ImmunoPrecise Antibodies had liabilities of CA$7.60m due within a year, and liabilities of CA$5.91m falling due after that. Offsetting this, it had CA$6.06m in cash and CA$5.47m in receivables that were due within 12 months. So it has liabilities totalling CA$1.97m more than its cash and near-term receivables, combined.
This state of affairs indicates that ImmunoPrecise Antibodies's balance sheet looks quite solid, as its total liabilities are just about equal to its liquid assets. So it's very unlikely that the CA$164.4m company is short on cash, but still worth keeping an eye on the balance sheet. Despite its noteworthy liabilities, ImmunoPrecise Antibodies 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 ImmunoPrecise Antibodies 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.
In the last year ImmunoPrecise Antibodies wasn't profitable at an EBIT level, but managed to grow its revenue by 40%, to CA$15m. Shareholders probably have their fingers crossed that it can grow its way to profits.
So How Risky Is ImmunoPrecise Antibodies?
Statistically speaking companies that lose money are riskier than those that make money. And we do note that ImmunoPrecise Antibodies had an earnings before interest and tax (EBIT) loss, over the last year. And over the same period it saw negative free cash outflow of CA$1.3m and booked a CA$3.5m accounting loss. With only CA$3.42m on the balance sheet, it would appear that its going to need to raise capital again soon. With very solid revenue growth in the last year, ImmunoPrecise Antibodies may be on a path to profitability. Pre-profit companies are often risky, but they can also offer great rewards. There's no doubt that we learn most about debt from the balance sheet. But ultimately, every company can contain risks that exist outside of the balance sheet. For example, we've discovered 3 warning signs for ImmunoPrecise Antibodies that you should be aware of before investing here.
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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