Health Check: How Prudently Does Adaptimmune Therapeutics (NASDAQ:ADAP) Use Debt?

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 Adaptimmune Therapeutics plc (NASDAQ:ADAP) does have debt on its balance sheet. But the real question is whether this debt is making the company risky.

When Is Debt A Problem?

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. Ultimately, if the company can't fulfill its legal obligations to repay debt, shareholders could walk away with nothing. 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, 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 examine debt levels, we first consider both cash and debt levels, together.

See our latest analysis for Adaptimmune Therapeutics

What Is Adaptimmune Therapeutics's Debt?

You can click the graphic below for the historical numbers, but it shows that as of September 2024 Adaptimmune Therapeutics had US$49.9m of debt, an increase on none, over one year. But it also has US$186.1m in cash to offset that, meaning it has US$136.2m net cash.

How Strong Is Adaptimmune Therapeutics' Balance Sheet?

The latest balance sheet data shows that Adaptimmune Therapeutics had liabilities of US$63.5m due within a year, and liabilities of US$174.0m falling due after that. Offsetting this, it had US$186.1m in cash and US$38.6m in receivables that were due within 12 months. So its liabilities outweigh the sum of its cash and (near-term) receivables by US$12.7m.

Of course, Adaptimmune Therapeutics has a market capitalization of US$148.4m, so these liabilities are probably manageable. Having said that, it's clear that we should continue to monitor its balance sheet, lest it change for the worse. While it does have liabilities worth noting, Adaptimmune Therapeutics 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 ultimately the future profitability of the business will decide if Adaptimmune Therapeutics can strengthen its balance sheet over time. So if you're focused on the future you can check out this free report showing analyst profit forecasts.

Over 12 months, Adaptimmune Therapeutics reported revenue of US$175m, which is a gain of 146%, although it did not report any earnings before interest and tax. So there's no doubt that shareholders are cheering for growth

So How Risky Is Adaptimmune Therapeutics?

We have no doubt that loss making companies are, in general, riskier than profitable ones. And the fact is that over the last twelve months Adaptimmune Therapeutics lost money at the earnings before interest and tax (EBIT) line. Indeed, in that time it burnt through US$56m of cash and made a loss of US$45m. While this does make the company a bit risky, it's important to remember it has net cash of US$136.2m. That means it could keep spending at its current rate for more than two years. The good news for shareholders is that Adaptimmune Therapeutics has dazzling revenue growth, so there's a very good chance it can boost its free cash flow in the years to come. While unprofitable companies can be risky, they can also grow hard and fast in those pre-profit years. The balance sheet is clearly the area to focus on when you are analysing debt. However, not all investment risk resides within the balance sheet - far from it. Be aware that Adaptimmune Therapeutics is showing 4 warning signs in our investment analysis , and 1 of those is significant...

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.

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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.