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 Transgene SA (EPA:TNG) does have debt on its balance sheet. But the real question is whether this debt is making the company risky.
What Risk Does Debt Bring?
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. 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. Having said that, the most common situation is where a company manages its debt reasonably well - and to its own advantage. When we examine debt levels, we first consider both cash and debt levels, together.
What Is Transgene's Net Debt?
You can click the graphic below for the historical numbers, but it shows that Transgene had €13.7m of debt in June 2021, down from €23.2m, one year before. However, its balance sheet shows it holds €48.1m in cash, so it actually has €34.4m net cash.
How Strong Is Transgene's Balance Sheet?
According to the last reported balance sheet, Transgene had liabilities of €13.2m due within 12 months, and liabilities of €21.0m due beyond 12 months. Offsetting these obligations, it had cash of €48.1m as well as receivables valued at €2.56m due within 12 months. So it actually has €16.4m more liquid assets than total liabilities.
This surplus suggests that Transgene has a conservative balance sheet, and could probably eliminate its debt without much difficulty. Simply put, the fact that Transgene 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 it is future earnings, more than anything, that will determine Transgene's ability to maintain a healthy balance sheet going forward. So if you're focused on the future you can check out this free report showing analyst profit forecasts.
Over 12 months, Transgene made a loss at the EBIT level, and saw its revenue drop to €9.0m, which is a fall of 36%. 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 in the last year Transgene had an earnings before interest and tax (EBIT) loss, truth be told. And over the same period it saw negative free cash outflow of €31m and booked a €27m accounting loss. However, it has net cash of €34.4m, so it has a bit of time before it will need more capital. Overall, its balance sheet doesn't seem overly risky, at the moment, but we're always cautious until we see the positive free cash flow. There's no doubt that we learn most about debt from the balance sheet. However, not all investment risk resides within the balance sheet - far from it. We've identified 3 warning signs with Transgene (at least 1 which is a bit concerning) , and understanding them should be part of your investment process.
If, after all that, you're more interested in a fast growing company with a rock-solid balance sheet, then check out our list of net cash growth stocks without delay.
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.
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