Is OSE Immunotherapeutics (EPA:OSE) A Risky Investment?

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 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. We can see that OSE Immunotherapeutics SA (EPA:OSE) does use debt in its business. But is this debt a concern to shareholders?

When Is Debt Dangerous?

Debt assists a business until the business has trouble paying it off, either with new capital or with free cash flow. If things get really bad, the lenders can take control of the business. 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. The first step when considering a company's debt levels is to consider its cash and debt together.

Check out our latest analysis for OSE Immunotherapeutics

What Is OSE Immunotherapeutics's Net Debt?

You can click the graphic below for the historical numbers, but it shows that as of December 2020 OSE Immunotherapeutics had €16.6m of debt, an increase on €9.76m, over one year. However, its balance sheet shows it holds €29.4m in cash, so it actually has €12.8m net cash.

How Strong Is OSE Immunotherapeutics' Balance Sheet?

According to the last reported balance sheet, OSE Immunotherapeutics had liabilities of €14.1m due within 12 months, and liabilities of €21.5m due beyond 12 months. On the other hand, it had cash of €29.4m and €6.92m worth of receivables due within a year. So these liquid assets roughly match the total liabilities.

This state of affairs indicates that OSE Immunotherapeutics' balance sheet looks quite solid, as its total liabilities are just about equal to its liquid assets. So while it's hard to imagine that the €197.2m company is struggling for cash, we still think it's worth monitoring its balance sheet. Simply put, the fact that OSE Immunotherapeutics 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 OSE Immunotherapeutics can strengthen its balance sheet over time. So if you're focused on the future you can check out this free report showing analyst profit forecasts.

Over 12 months, OSE Immunotherapeutics made a loss at the EBIT level, and saw its revenue drop to €10m, which is a fall of 60%. That makes us nervous, to say the least.

So How Risky Is OSE Immunotherapeutics?

Statistically speaking companies that lose money are riskier than those that make money. And the fact is that over the last twelve months OSE Immunotherapeutics lost money at the earnings before interest and tax (EBIT) line. And over the same period it saw negative free cash outflow of €19m and booked a €17m accounting loss. With only €12.8m on the balance sheet, it would appear that its going to need to raise capital again soon. Even though its balance sheet seems sufficiently liquid, debt always makes us a little nervous if a company doesn't produce free cash flow regularly. 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. These risks can be hard to spot. Every company has them, and we've spotted 2 warning signs for OSE Immunotherapeutics you should know about.

When all is said and done, sometimes its easier to focus on companies that don't even need debt. Readers can access a list of growth stocks with zero net debt 100% free, right now.

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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.
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