Is Werewolf Therapeutics (NASDAQ:HOWL) Using Debt Sensibly?

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.' 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. As with many other companies Werewolf Therapeutics, Inc. (NASDAQ:HOWL) makes use of debt. But should shareholders be worried about its use of debt?

When Is Debt A Problem?

Debt assists a business until the business has trouble paying it off, either with new capital or with free cash flow. If things get really bad, the lenders can take control of the business. 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, debt can be an important tool in businesses, particularly capital heavy businesses. When we examine debt levels, we first consider both cash and debt levels, together.

See our latest analysis for Werewolf Therapeutics

How Much Debt Does Werewolf Therapeutics Carry?

The chart below, which you can click on for greater detail, shows that Werewolf Therapeutics had US$39.4m in debt in March 2024; about the same as the year before. But it also has US$139.2m in cash to offset that, meaning it has US$99.8m 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$21.2m due within 12 months and liabilities of US$38.8m due beyond that. Offsetting these obligations, it had cash of US$139.2m as well as receivables valued at US$775.0k due within 12 months. So it actually has US$80.0m more liquid assets than total liabilities.

This luscious liquidity implies that Werewolf Therapeutics' balance sheet is sturdy like a giant sequoia tree. On this view, lenders should feel as safe as the beloved of a black-belt karate master. 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 it is future earnings, more than anything, that will determine Werewolf Therapeutics's ability to maintain a healthy balance sheet going forward. So if you're focused on the future you can check out this free report showing analyst profit forecasts.

In the last year Werewolf Therapeutics had a loss before interest and tax, and actually shrunk its revenue by 22%, to US$16m. To be frank that doesn't bode well.

So How Risky Is Werewolf Therapeutics?

By their very nature companies that are losing money are more risky than those with a long history of profitability. And in the last year Werewolf Therapeutics had an earnings before interest and tax (EBIT) loss, truth be told. Indeed, in that time it burnt through US$39m of cash and made a loss of US$42m. But the saving grace is the US$99.8m on the balance sheet. That kitty means the company can keep spending for growth for at least two years, at current rates. 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. 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.

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