Health Check: How Prudently Does Humanigen (NASDAQ:HGEN) Use Debt?

Howard Marks put it nicely when he said that, rather than worrying about share price volatility, 'The possibility of permanent loss is the risk I worry about... and every practical investor I know worries about.' 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 note that Humanigen, Inc. (NASDAQ:HGEN) does have debt on its balance sheet. But should shareholders be worried about its use of debt?

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. If things get really bad, the lenders can take control of the business. 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, 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.

View our latest analysis for Humanigen

What Is Humanigen's Net Debt?

You can click the graphic below for the historical numbers, but it shows that as of March 2021 Humanigen had US$24.4m of debt, an increase on US$7.32m, over one year. However, its balance sheet shows it holds US$92.9m in cash, so it actually has US$68.4m net cash.

A Look At Humanigen's Liabilities

The latest balance sheet data shows that Humanigen had liabilities of US$53.3m due within a year, and liabilities of US$28.6m falling due after that. Offsetting these obligations, it had cash of US$92.9m as well as receivables valued at US$5.01m due within 12 months. So it actually has US$16.1m more liquid assets than total liabilities.

Having regard to Humanigen's size, it seems that its liquid assets are well balanced with its total liabilities. So it's very unlikely that the US$1.03b company is short on cash, but still worth keeping an eye on the balance sheet. Simply put, the fact that Humanigen has more cash than debt is arguably a good indication that it can manage its debt safely. There's no doubt that we learn most about debt from the balance sheet. But it is future earnings, more than anything, that will determine Humanigen's ability to maintain a healthy balance sheet going forward. 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 Humanigen managed to produce its first revenue as a listed company, but given the lack of profit, shareholders will no doubt be hoping to see some strong increases.

So How Risky Is Humanigen?

Statistically speaking companies that lose money are riskier than those that make money. And in the last year Humanigen had an earnings before interest and tax (EBIT) loss, truth be told. And over the same period it saw negative free cash outflow of US$105m and booked a US$153m accounting loss. Given it only has net cash of US$68.4m, the company may need to raise more capital if it doesn't reach break-even soon. The good news for shareholders is that Humanigen 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. There's no doubt that we learn most about debt from the balance sheet. But ultimately, every company can contain risks that exist outside of the balance sheet. For instance, we've identified 6 warning signs for Humanigen (2 don't sit too well with us) 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.

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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. 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.
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