Is Werewolf Therapeutics (NASDAQ:HOWL) A Risky Investment?

Legendary fund manager Li Lu (who Charlie Munger backed) once said, '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 can see that Werewolf Therapeutics, Inc. (NASDAQ:HOWL) does use debt in its business. But should shareholders be worried about its use of debt?

What Risk Does Debt Bring?

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. However, a more usual (but still expensive) situation is where a company must dilute shareholders at a cheap share price simply to get debt under control. By replacing dilution, though, debt can be an extremely good tool for businesses that need capital to invest in growth at high rates of return. When we examine debt levels, we first consider both cash and debt levels, together.

Check out our latest analysis for Werewolf Therapeutics

What Is Werewolf Therapeutics's Debt?

As you can see below, at the end of September 2023, Werewolf Therapeutics had US$39.2m of debt, up from none a year ago. Click the image for more detail. But it also has US$130.1m in cash to offset that, meaning it has US$90.8m net cash.

How Strong Is Werewolf Therapeutics' Balance Sheet?

Zooming in on the latest balance sheet data, we can see that Werewolf Therapeutics had liabilities of US$14.4m due within 12 months and liabilities of US$49.5m due beyond that. Offsetting this, it had US$130.1m in cash and US$5.91m in receivables that were due within 12 months. So it actually has US$72.0m more liquid assets than total liabilities.

This surplus liquidity suggests that Werewolf Therapeutics' balance sheet could take a hit just as well as Homer Simpson's head can take a punch. With this in mind one could posit that its balance sheet means the company is able to handle some adversity. Succinctly put, Werewolf Therapeutics 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 Werewolf Therapeutics 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.

Over 12 months, Werewolf Therapeutics reported revenue of US$26m, which is a gain of 182%, although it did not report any earnings before interest and tax. So its pretty obvious shareholders are hoping for more growth!

So How Risky Is Werewolf Therapeutics?

Statistically speaking companies that lose money are riskier than those that make money. And we do note that Werewolf Therapeutics had an earnings before interest and tax (EBIT) loss, over the last year. Indeed, in that time it burnt through US$41m of cash and made a loss of US$37m. While this does make the company a bit risky, it's important to remember it has net cash of US$90.8m. That means it could keep spending at its current rate for more than two years. Importantly, Werewolf Therapeutics's revenue growth is hot to trot. High growth pre-profit companies may well be risky, but they can also offer great rewards. When analysing debt levels, the balance sheet is the obvious place to start. However, not all investment risk resides within the balance sheet - far from it. These risks can be hard to spot. Every company has them, and we've spotted 4 warning signs for Werewolf Therapeutics (of which 2 are concerning!) you should know about.

If, after all that, you're more interested in a fast growing company with a rock-solid balance sheet, then check out our list of net cash growth stocks without delay.

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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.