Would OSE Immunotherapeutics (EPA:OSE) Be Better Off With Less Debt?

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. We note that OSE Immunotherapeutics SA (EPA:OSE) does have debt on its balance sheet. But should shareholders be worried about its use of debt?

Why Does Debt Bring Risk?

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. If things get really bad, the lenders can take control of the business. 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. By replacing dilution, though, debt can be an extremely good tool for businesses that need capital to invest in growth at high rates of return. The first step when considering a company's debt levels is to consider its cash and debt together.

See our latest analysis for OSE Immunotherapeutics

What Is OSE Immunotherapeutics's Debt?

As you can see below, OSE Immunotherapeutics had €41.9m of debt, at December 2023, which is about the same as the year before. You can click the chart for greater detail. However, it does have €18.7m in cash offsetting this, leading to net debt of about €23.2m.

How Strong Is OSE Immunotherapeutics' Balance Sheet?

According to the last reported balance sheet, OSE Immunotherapeutics had liabilities of €18.8m due within 12 months, and liabilities of €40.3m due beyond 12 months. Offsetting this, it had €18.7m in cash and €982.0k in receivables that were due within 12 months. So it has liabilities totalling €39.4m more than its cash and near-term receivables, combined.

OSE Immunotherapeutics has a market capitalization of €180.8m, so it could very likely raise cash to ameliorate its balance sheet, if the need arose. But we definitely want to keep our eyes open to indications that its debt is bringing too much risk. When analysing debt levels, the balance sheet is the obvious place to start. But ultimately the future profitability of the business will decide if OSE Immunotherapeutics 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 OSE Immunotherapeutics had a loss before interest and tax, and actually shrunk its revenue by 88%, to €2.2m. That makes us nervous, to say the least.

Caveat Emptor

While OSE Immunotherapeutics's falling revenue is about as heartwarming as a wet blanket, arguably its earnings before interest and tax (EBIT) loss is even less appealing. Indeed, it lost a very considerable €23m at the EBIT level. Considering that alongside the liabilities mentioned above does not give us much confidence that company should be using so much debt. Quite frankly we think the balance sheet is far from match-fit, although it could be improved with time. Another cause for caution is that is bled €20m in negative free cash flow over the last twelve months. So suffice it to say we consider the stock very risky. When analysing debt levels, the balance sheet is the obvious place to start. However, not all investment risk resides within the balance sheet - far from it. For example, we've discovered 4 warning signs for OSE Immunotherapeutics (2 are potentially serious!) 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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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.