Is HOOKIPA Pharma (NASDAQ:HOOK) A Risky Investment?

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.' When we think about how risky a company is, we always like to look at its use of debt, since debt overload can lead to ruin. We can see that HOOKIPA Pharma Inc. (NASDAQ:HOOK) does use debt in its business. But is this debt a concern to shareholders?

When Is Debt Dangerous?

Debt assists a business until the business has trouble paying it off, either with new capital or with free 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 common (but still painful) scenario is that it has to raise new equity capital at a low price, thus permanently diluting shareholders. 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. When we examine debt levels, we first consider both cash and debt levels, together.

See our latest analysis for HOOKIPA Pharma

What Is HOOKIPA Pharma's Debt?

As you can see below, HOOKIPA Pharma had US$2.51m of debt at December 2022, down from US$5.01m a year prior. However, its balance sheet shows it holds US$112.5m in cash, so it actually has US$110.0m net cash.

How Strong Is HOOKIPA Pharma's Balance Sheet?

Zooming in on the latest balance sheet data, we can see that HOOKIPA Pharma had liabilities of US$35.6m due within 12 months and liabilities of US$32.3m due beyond that. Offsetting this, it had US$112.5m in cash and US$22.0m in receivables that were due within 12 months. So it can boast US$66.6m more liquid assets than total liabilities.

This excess liquidity is a great indication that HOOKIPA Pharma's balance sheet is almost as strong as Fort Knox. On this view, lenders should feel as safe as the beloved of a black-belt karate master. Succinctly put, HOOKIPA Pharma boasts net cash, so it's fair to say it does not have a heavy debt load! There's no doubt that we learn most about debt from the balance sheet. But ultimately the future profitability of the business will decide if HOOKIPA Pharma 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.

Over 12 months, HOOKIPA Pharma made a loss at the EBIT level, and saw its revenue drop to US$14m, which is a fall of 23%. That makes us nervous, to say the least.

So How Risky Is HOOKIPA Pharma?

Statistically speaking companies that lose money are riskier than those that make money. And in the last year HOOKIPA Pharma had an earnings before interest and tax (EBIT) loss, truth be told. Indeed, in that time it burnt through US$25m of cash and made a loss of US$65m. While this does make the company a bit risky, it's important to remember it has net cash of US$110.0m. That means it could keep spending at its current rate for more than two years. 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. 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 example - HOOKIPA Pharma has 2 warning signs we think 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. 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.