Rock star Growth Puts Alphamab Oncology (HKG:9966) In A Position To Use Debt

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. Importantly, Alphamab Oncology (HKG:9966) does carry debt. 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. 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. Of course, plenty of companies use debt to fund growth, without any negative consequences. When we examine debt levels, we first consider both cash and debt levels, together.

See our latest analysis for Alphamab Oncology

What Is Alphamab Oncology's Net Debt?

You can click the graphic below for the historical numbers, but it shows that as of June 2021 Alphamab Oncology had CN¥296.5m of debt, an increase on CN¥230.0m, over one year. But it also has CN¥1.92b in cash to offset that, meaning it has CN¥1.62b net cash.

A Look At Alphamab Oncology's Liabilities

Zooming in on the latest balance sheet data, we can see that Alphamab Oncology had liabilities of CN¥383.0m due within 12 months and liabilities of CN¥106.5m due beyond that. Offsetting these obligations, it had cash of CN¥1.92b as well as receivables valued at CN¥53.1m due within 12 months. So it actually has CN¥1.48b more liquid assets than total liabilities.

This short term liquidity is a sign that Alphamab Oncology could probably pay off its debt with ease, as its balance sheet is far from stretched. Simply put, the fact that Alphamab Oncology has more cash than debt is arguably a good indication that it can manage its debt safely. When analysing debt levels, the balance sheet is the obvious place to start. But ultimately the future profitability of the business will decide if Alphamab Oncology 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.

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

So How Risky Is Alphamab Oncology?

By their very nature companies that are losing money are more risky than those with a long history of profitability. And we do note that Alphamab Oncology had an earnings before interest and tax (EBIT) loss, over the last year. And over the same period it saw negative free cash outflow of CN¥519m and booked a CN¥592m accounting loss. While this does make the company a bit risky, it's important to remember it has net cash of CN¥1.62b. That kitty means the company can keep spending for growth for at least two years, at current rates. 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. 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 2 warning signs with Alphamab Oncology , and understanding them should be part of your investment process.

If you're interested in investing in businesses that can grow profits without the burden of debt, then check out this free list of growing businesses that have net cash on the balance sheet.

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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