Is ALX Oncology Holdings (NASDAQ:ALXO) Using Debt In A Risky Way?

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.' It's only natural to consider a company's balance sheet when you examine how risky it is, since debt is often involved when a business collapses. We note that ALX Oncology Holdings Inc. (NASDAQ:ALXO) does have debt on its balance sheet. But the real question is whether this debt is making the company risky.

Why Does Debt Bring Risk?

Debt assists a business until the business has trouble paying it off, either with new capital or with free 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, plenty of companies use debt to fund growth, without any negative consequences. When we examine debt levels, we first consider both cash and debt levels, together.

See our latest analysis for ALX Oncology Holdings

How Much Debt Does ALX Oncology Holdings Carry?

The chart below, which you can click on for greater detail, shows that ALX Oncology Holdings had US$9.64m in debt in December 2023; about the same as the year before. However, it does have US$182.7m in cash offsetting this, leading to net cash of US$173.1m.

How Strong Is ALX Oncology Holdings' Balance Sheet?

The latest balance sheet data shows that ALX Oncology Holdings had liabilities of US$36.0m due within a year, and liabilities of US$16.8m falling due after that. Offsetting these obligations, it had cash of US$182.7m as well as receivables valued at US$600.0k due within 12 months. So it can boast US$130.5m more liquid assets than total liabilities.

This surplus suggests that ALX Oncology Holdings is using debt in a way that is appears to be both safe and conservative. Given it has easily adequate short term liquidity, we don't think it will have any issues with its lenders. Simply put, the fact that ALX Oncology Holdings 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 ALX Oncology Holdings 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.

Given its lack of meaningful operating revenue, ALX Oncology Holdings shareholders no doubt hope it can fund itself until it has a profitable product.

So How Risky Is ALX Oncology Holdings?

We have no doubt that loss making companies are, in general, riskier than profitable ones. And in the last year ALX Oncology Holdings had an earnings before interest and tax (EBIT) loss, truth be told. Indeed, in that time it burnt through US$132m of cash and made a loss of US$161m. But at least it has US$173.1m 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. 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 instance, we've identified 5 warning signs for ALX Oncology Holdings (1 makes us a bit uncomfortable) you should be aware of.

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.

Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team (at) simplywallst.com.

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.