Does Affimed (NASDAQ:AFMD) Have A Healthy Balance Sheet?

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 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. We can see that Affimed N.V. (NASDAQ:AFMD) does use debt in its business. But the more important question is: how much risk is that debt creating?

Why Does Debt Bring Risk?

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. In the worst case scenario, a company can go bankrupt if it cannot pay its creditors. However, a more usual (but still expensive) situation is where a company must dilute shareholders at a cheap share price simply to get debt under control. 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.

Check out our latest analysis for Affimed

How Much Debt Does Affimed Carry?

As you can see below, at the end of September 2021, Affimed had €10.2m of debt, up from €1.28m a year ago. Click the image for more detail. But it also has €198.7m in cash to offset that, meaning it has €188.6m net cash.

How Healthy Is Affimed's Balance Sheet?

Zooming in on the latest balance sheet data, we can see that Affimed had liabilities of €66.3m due within 12 months and liabilities of €20.2m due beyond that. Offsetting this, it had €198.7m in cash and €3.16m in receivables that were due within 12 months. So it can boast €115.4m more liquid assets than total liabilities.

This surplus suggests that Affimed is using debt in a way that is appears to be both safe and conservative. Because it has plenty of assets, it is unlikely to have trouble with its lenders. Simply put, the fact that Affimed 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 Affimed 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.

Over 12 months, Affimed reported revenue of €41m, which is a gain of 83%, although it did not report any earnings before interest and tax. With any luck the company will be able to grow its way to profitability.

So How Risky Is Affimed?

Statistically speaking companies that lose money are riskier than those that make money. And the fact is that over the last twelve months Affimed lost money at the earnings before interest and tax (EBIT) line. Indeed, in that time it burnt through €45m of cash and made a loss of €49m. But the saving grace is the €188.6m on the balance sheet. That means it could keep spending at its current rate for more than two years. With very solid revenue growth in the last year, Affimed may be on a path to profitability. Pre-profit companies are often risky, but they can also offer great rewards. 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 example - Affimed has 3 warning signs we think 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.