Is Transgene (EPA:TNG) Using Too Much Debt?

Some say volatility, rather than debt, is the best way to think about risk as an investor, but Warren Buffett famously said that 'Volatility is far from synonymous with risk.' 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. Importantly, Transgene SA (EPA:TNG) does carry debt. But the more important question is: how much risk is that debt creating?

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When Is Debt A Problem?

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. In the worst case scenario, a company can go bankrupt if it cannot pay its creditors. However, a more frequent (but still costly) occurrence is where a company must issue shares at bargain-basement prices, permanently diluting shareholders, just to shore up its balance sheet. Of course, debt can be an important tool in businesses, particularly capital heavy businesses. When we think about a company's use of debt, we first look at cash and debt together.

What Is Transgene's Debt?

You can click the graphic below for the historical numbers, but it shows that Transgene had €10.4m of debt in December 2024, down from €16.0m, one year before. However, it does have €16.7m in cash offsetting this, leading to net cash of €6.29m.

How Healthy Is Transgene's Balance Sheet?

The latest balance sheet data shows that Transgene had liabilities of €14.0m due within a year, and liabilities of €13.0m falling due after that. Offsetting this, it had €16.7m in cash and €2.83m in receivables that were due within 12 months. So its liabilities total €7.47m more than the combination of its cash and short-term receivables.

Given Transgene has a market capitalization of €90.8m, it's hard to believe these liabilities pose much threat. But there are sufficient liabilities that we would certainly recommend shareholders continue to monitor the balance sheet, going forward. 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. The balance sheet is clearly the area to focus on when you are analysing debt. 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.

See our latest analysis for Transgene

Given its lack of meaningful operating revenue, Transgene shareholders no doubt hope it can fund itself until it has a profitable product.

So How Risky Is Transgene?

Statistically speaking companies that lose money are riskier than those that make money. 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 €27m and booked a €34m accounting loss. Given it only has net cash of €6.29m, the company may need to raise more capital if it doesn't reach break-even soon. 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. We've identified 4 warning signs with Transgene (at least 3 which make us uncomfortable) , and understanding them should be part of your investment process.

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.