Health Check: How Prudently Does Transgene (EPA:TNG) Use Debt?

Howard Marks put it nicely when he said that, rather than worrying about share price volatility, 'The possibility of permanent loss is the risk I worry about... and every practical investor I know worries about.' When we think about how risky a company is, we always like to look at its use of debt, since debt overload can lead to ruin. As with many other companies Transgene SA (EPA:TNG) makes use of debt. But the real question is whether this debt is making the company risky.

Why Does Debt Bring Risk?

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. 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. Having said that, the most common situation is where a company manages its debt reasonably well - and to its own advantage. The first thing to do when considering how much debt a business uses is to look at its cash and debt together.

View our latest analysis for Transgene

How Much Debt Does Transgene Carry?

You can click the graphic below for the historical numbers, but it shows that Transgene had €13.4m of debt in December 2020, down from €23.0m, one year before. However, its balance sheet shows it holds €26.4m in cash, so it actually has €13.0m net cash.

A Look At Transgene's Liabilities

Zooming in on the latest balance sheet data, we can see that Transgene had liabilities of €13.6m due within 12 months and liabilities of €21.6m due beyond that. Offsetting this, it had €26.4m in cash and €2.40m in receivables that were due within 12 months. So its liabilities total €6.45m more than the combination of its cash and short-term receivables.

Given Transgene has a market capitalization of €224.0m, it's hard to believe these liabilities pose much threat. Having said that, it's clear that we should continue to monitor its balance sheet, lest it change for the worse. While it does have liabilities worth noting, Transgene also has more cash than debt, so we're pretty confident it can manage its debt safely. There's no doubt that we learn most about debt from the balance sheet. But it is future earnings, more than anything, that will determine Transgene's ability to maintain a healthy balance sheet going forward. 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, Transgene made a loss at the EBIT level, and saw its revenue drop to €9.3m, which is a fall of 30%. That makes us nervous, to say the least.

So How Risky Is Transgene?

By their very nature companies that are losing money are more risky than those with a long history of profitability. And the fact is that over the last twelve months Transgene lost money at the earnings before interest and tax (EBIT) line. And over the same period it saw negative free cash outflow of €30m and booked a €17m accounting loss. But at least it has €13.0m on the balance sheet to spend on growth, near-term. Summing up, we're a little skeptical of this one, as it seems fairly risky in the absence of free cashflow. When analysing debt levels, the balance sheet is the obvious place to start. 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 4 warning signs for Transgene (of which 2 are potentially serious!) you should know about.

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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