Despite Lacking Profits Inventiva (EPA:IVA) Seems To Be On Top Of Its Debt

The external fund manager backed by Berkshire Hathaway's Charlie Munger, Li Lu, makes no bones about it when he says '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. We can see that Inventiva S.A. (EPA:IVA) does use debt in its business. But is this debt a concern to shareholders?

What Risk Does Debt Bring?

Generally speaking, debt only becomes a real problem when a company can't easily pay it off, either by raising capital or with its own cash flow. Ultimately, if the company can't fulfill its legal obligations to repay debt, shareholders could walk away with nothing. 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. Of course, plenty of companies use debt to fund growth, without any negative consequences. When we think about a company's use of debt, we first look at cash and debt together.

View our latest analysis for Inventiva

What Is Inventiva's Debt?

The chart below, which you can click on for greater detail, shows that Inventiva had €9.99m in debt in December 2021; about the same as the year before. But on the other hand it also has €87.3m in cash, leading to a €77.3m net cash position.

How Healthy Is Inventiva's Balance Sheet?

We can see from the most recent balance sheet that Inventiva had liabilities of €22.9m falling due within a year, and liabilities of €10.3m due beyond that. Offsetting this, it had €87.3m in cash and €11.6m in receivables that were due within 12 months. So it can boast €65.8m more liquid assets than total liabilities.

This excess liquidity suggests that Inventiva is taking a careful approach to debt. Given it has easily adequate short term liquidity, we don't think it will have any issues with its lenders. Simply put, the fact that Inventiva 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 Inventiva 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 Inventiva wasn't profitable at an EBIT level, but managed to grow its revenue by 62%, to €8.5m. Shareholders probably have their fingers crossed that it can grow its way to profits.

So How Risky Is Inventiva?

By their very nature companies that are losing money are more risky than those with a long history of profitability. And in the last year Inventiva had an earnings before interest and tax (EBIT) loss, truth be told. And over the same period it saw negative free cash outflow of €48m and booked a €50m accounting loss. But at least it has €77.3m on the balance sheet to spend on growth, near-term. Inventiva's revenue growth shone bright over the last year, so it may well be in a position to turn a profit in due course. By investing before those profits, shareholders take on more risk in the hope of bigger 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. To that end, you should be aware of the 3 warning signs we've spotted with Inventiva .

If you're interested in investing in businesses that can grow profits without the burden of debt, then check out this free list of growing businesses that have net cash on the balance sheet.

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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.