Health Check: How Prudently Does Affimed (NASDAQ:AFMD) 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. As with many other companies Affimed N.V. (NASDAQ:AFMD) makes use of debt. But the real question is whether this debt is making the company risky.

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. 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. 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

What Is Affimed's Debt?

You can click the graphic below for the historical numbers, but it shows that as of June 2022 Affimed had €17.9m of debt, an increase on €10.1m, over one year. However, its balance sheet shows it holds €237.2m in cash, so it actually has €219.4m net cash.

A Look At Affimed's Liabilities

Zooming in on the latest balance sheet data, we can see that Affimed had liabilities of €52.0m due within 12 months and liabilities of €16.1m due beyond that. On the other hand, it had cash of €237.2m and €5.52m worth of receivables due within a year. So it can boast €174.7m more liquid assets than total liabilities.

This surplus strongly suggests that Affimed has a rock-solid balance sheet (and the debt is of no concern whatsoever). On this view, lenders should feel as safe as the beloved of a black-belt karate master. Succinctly put, Affimed boasts net cash, so it's fair to say it does not have a heavy debt load! 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.

In the last year Affimed had a loss before interest and tax, and actually shrunk its revenue by 16%, to €36m. We would much prefer see growth.

So How Risky Is Affimed?

We have no doubt that loss making companies are, in general, riskier than profitable ones. And we do note that Affimed 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 €111m and booked a €76m accounting loss. While this does make the company a bit risky, it's important to remember it has net cash of €219.4m. 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 Affimed , and understanding them should be part of your investment process.

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.