Humanigen (NASDAQ:HGEN) Has Debt But No Earnings; Should You Worry?

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 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. Importantly, Humanigen, Inc. (NASDAQ:HGEN) does carry debt. But should shareholders be worried about its use of debt?

When Is Debt A Problem?

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. Part and parcel of capitalism is the process of 'creative destruction' where failed businesses are mercilessly liquidated by their bankers. 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. When we think about a company's use of debt, we first look at cash and debt together.

See our latest analysis for Humanigen

What Is Humanigen's Net Debt?

As you can see below, at the end of June 2021, Humanigen had US$24.6m of debt, up from US$8.0k a year ago. Click the image for more detail. However, its balance sheet shows it holds US$120.5m in cash, so it actually has US$95.9m net cash.

How Healthy Is Humanigen's Balance Sheet?

Zooming in on the latest balance sheet data, we can see that Humanigen had liabilities of US$50.3m due within 12 months and liabilities of US$27.7m due beyond that. Offsetting these obligations, it had cash of US$120.5m as well as receivables valued at US$5.01m due within 12 months. So it actually has US$47.5m more liquid assets than total liabilities.

This surplus suggests that Humanigen has a conservative balance sheet, and could probably eliminate its debt without much difficulty. Simply put, the fact that Humanigen 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 Humanigen 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 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?

By their very nature companies that are losing money are more risky than those with a long history of profitability. And we do note that Humanigen had an earnings before interest and tax (EBIT) loss, over the last year. Indeed, in that time it burnt through US$151m of cash and made a loss of US$199m. With only US$95.9m on the balance sheet, it would appear that its going to need to raise capital again soon. 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. When analysing debt levels, the balance sheet is the obvious place to start. But ultimately, every company can contain risks that exist outside of the balance sheet. Be aware that Humanigen is showing 5 warning signs in our investment analysis , you should know about...

Of course, if you're the type of investor who prefers buying stocks without the burden of debt, then don't hesitate to discover our exclusive list of net cash growth stocks, today.

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.

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