Werewolf Therapeutics (NASDAQ:HOWL) Has Debt But No Earnings; Should You Worry?

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. Importantly, Werewolf Therapeutics, Inc. (NASDAQ:HOWL) does carry debt. But is this debt a concern to shareholders?

Why Does Debt Bring Risk?

Debt and other liabilities become risky for a business when it cannot easily fulfill those obligations, either with free cash flow or by raising capital at an attractive price. In the worst case scenario, a company can go bankrupt if it cannot pay its creditors. 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. Having said that, the most common situation is where a company manages its debt reasonably well - and to its own advantage. The first thing to do when considering how much debt a business uses is to look at its cash and debt together.

Check out our latest analysis for Werewolf Therapeutics

What Is Werewolf Therapeutics's Net Debt?

As you can see below, Werewolf Therapeutics had US$25.6m of debt at September 2024, down from US$39.2m a year prior. However, it does have US$122.8m in cash offsetting this, leading to net cash of US$97.2m.

How Healthy Is Werewolf Therapeutics' Balance Sheet?

The latest balance sheet data shows that Werewolf Therapeutics had liabilities of US$12.5m due within a year, and liabilities of US$38.2m falling due after that. Offsetting these obligations, it had cash of US$122.8m as well as receivables valued at US$464.0k due within 12 months. So it actually has US$72.6m 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 ultimately the future profitability of the business will decide if Werewolf Therapeutics 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, Werewolf Therapeutics made a loss at the EBIT level, and saw its revenue drop to US$3.4m, which is a fall of 87%. 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$47m of cash and made a loss of US$62m. While this does make the company a bit risky, it's important to remember it has net cash of US$97.2m. 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. There's no doubt that we learn most about debt from the balance sheet. However, not all investment risk resides within the balance sheet - far from it. For instance, we've identified 6 warning signs for Werewolf Therapeutics (2 shouldn't be ignored) you should be aware of.

If you're interested in investing in businesses that can grow profits without the burden of debt, then check out this free list of growing businesses that have net cash on the balance sheet.

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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.