Health Check: How Prudently Does Immunicum (STO:IMMU) 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 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. As with many other companies Immunicum AB (publ) (STO:IMMU) makes use of debt. But the more important question is: how much risk is that debt creating?

When Is Debt Dangerous?

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. Ultimately, if the company can't fulfill its legal obligations to repay debt, shareholders could walk away with nothing. 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, the upside of debt is that it often represents cheap capital, especially when it replaces dilution in a company with the ability to reinvest at high rates of return. When we think about a company's use of debt, we first look at cash and debt together.

Check out our latest analysis for Immunicum

What Is Immunicum's Net Debt?

As you can see below, at the end of December 2021, Immunicum had kr36.7m of debt, up from kr33.9m a year ago. Click the image for more detail. However, its balance sheet shows it holds kr155.3m in cash, so it actually has kr118.6m net cash.

How Healthy Is Immunicum's Balance Sheet?

According to the last reported balance sheet, Immunicum had liabilities of kr27.6m due within 12 months, and liabilities of kr36.7m due beyond 12 months. Offsetting these obligations, it had cash of kr155.3m as well as receivables valued at kr19.7m due within 12 months. So it can boast kr110.8m more liquid assets than total liabilities.

It's good to see that Immunicum has plenty of liquidity on its balance sheet, suggesting conservative management of liabilities. Due to its strong net asset position, it is not likely to face issues with its lenders. Succinctly put, Immunicum boasts net cash, so it's fair to say it does not have a heavy debt load! 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 Immunicum'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.

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

So How Risky Is Immunicum?

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 Immunicum 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 kr139m and booked a kr133m accounting loss. But at least it has kr118.6m on the balance sheet to spend on growth, near-term. 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. The balance sheet is clearly the area to focus on when you are analysing debt. But ultimately, every company can contain risks that exist outside of the balance sheet. For instance, we've identified 5 warning signs for Immunicum (2 are a bit unpleasant) you should be aware of.

When all is said and done, sometimes its easier to focus on companies that don't even need debt. Readers can access a list of growth stocks with zero net debt 100% free, right now.

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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.