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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. Importantly, Alpine Immune Sciences, Inc. (NASDAQ:ALPN) does carry debt. But is this debt a concern to shareholders?
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. In the worst case scenario, a company can go bankrupt if it cannot pay its creditors. 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.
What Is Alpine Immune Sciences’s Debt?
As you can see below, Alpine Immune Sciences had US$3.74m of debt at March 2019, down from US$5.08m a year prior. However, its balance sheet shows it holds US$64.0m in cash, so it actually has US$60.2m net cash.
How Strong Is Alpine Immune Sciences’s Balance Sheet?
The latest balance sheet data shows that Alpine Immune Sciences had liabilities of US$8.85m due within a year, and liabilities of US$1.67m falling due after that. Offsetting this, it had US$64.0m in cash and US$237.0k in receivables that were due within 12 months. So it can boast US$53.7m more liquid assets than total liabilities.
This surplus liquidity suggests that Alpine Immune Sciences’s balance sheet could take a hit just as well as Homer Simpson’s head can take a punch. Having regard to this fact, we think its balance sheet is just as strong as misogynists are weak. Given that Alpine Immune Sciences has more cash than debt, 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 Alpine Immune Sciences 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.
Since Alpine Immune Sciences 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 Alpine Immune Sciences?
Statistically speaking companies that lose money are riskier than those that make money. And we do note that Alpine Immune Sciences had negative earnings before interest and tax (EBIT), over the last year. And over the same period it saw negative free cash outflow of US$35m and booked a US$44m accounting loss. However, it has net cash of US$64m, so it has a bit of time before it will need more capital. 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. When I consider a company to be a bit risky, I think it is responsible to check out whether insiders have been reporting any share sales. Luckily, you can click here ito see our graphic depicting Alpine Immune Sciences insider transactions.
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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If you spot an error that warrants correction, please contact the editor at firstname.lastname@example.org. This article by Simply Wall St is general in nature. It does not constitute a recommendation to buy or sell any stock, and does not take account of your objectives, or your financial situation. Simply Wall St has no position in the stocks mentioned. Thank you for reading.