Is Immunicum (STO:IMMU) 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 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?

What Risk Does Debt Bring?

Debt and other liabilities become risky for a business when it cannot easily fulfill those obligations, either with free cash flow or by raising capital at an attractive price. 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, debt can be an important tool in businesses, particularly capital heavy businesses. The first thing to do when considering how much debt a business uses is to look at its cash and debt together.

See our latest analysis for Immunicum

How Much Debt Does Immunicum Carry?

As you can see below, at the end of September 2021, Immunicum had kr36.1m of debt, up from kr850.0k a year ago. Click the image for more detail. But on the other hand it also has kr181.5m in cash, leading to a kr145.4m net cash position.

How Healthy Is Immunicum's Balance Sheet?

The latest balance sheet data shows that Immunicum had liabilities of kr19.6m due within a year, and liabilities of kr36.1m falling due after that. Offsetting these obligations, it had cash of kr181.5m as well as receivables valued at kr17.5m due within 12 months. So it can boast kr143.3m more liquid assets than total liabilities.

This surplus suggests that Immunicum is using debt in a way that is appears to be both safe and conservative. Due to its strong net asset position, it is not likely to face issues with its lenders. Simply put, the fact that Immunicum has more cash than debt is arguably a good indication that 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 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.

Since Immunicum doesn't have significant operating revenue, shareholders may be hoping it comes up with a great new product, before it runs out of money.

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 the fact is that over the last twelve months Immunicum lost money at the earnings before interest and tax (EBIT) line. And over the same period it saw negative free cash outflow of kr130m and booked a kr148m accounting loss. But at least it has kr145.4m on the balance sheet to spend on growth, near-term. 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. 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. To that end, you should learn about the 5 warning signs we've spotted with Immunicum (including 2 which are a bit unpleasant) .

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.