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.' 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 Inovio Pharmaceuticals, Inc. (NASDAQ:INO) does use debt in its business. But should shareholders be worried about its use of debt?
What Risk Does Debt Bring?
Debt assists a business until the business has trouble paying it off, either with new capital or with free cash flow. Ultimately, if the company can't fulfill its legal obligations to repay debt, shareholders could walk away with nothing. 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, 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 think about a company's use of debt, we first look at cash and debt together.
How Much Debt Does Inovio Pharmaceuticals Carry?
As you can see below, Inovio Pharmaceuticals had US$53.7m of debt at September 2020, down from US$70.1m a year prior. But on the other hand it also has US$337.2m in cash, leading to a US$283.5m net cash position.
How Healthy Is Inovio Pharmaceuticals' Balance Sheet?
The latest balance sheet data shows that Inovio Pharmaceuticals had liabilities of US$41.3m due within a year, and liabilities of US$72.6m falling due after that. Offsetting this, it had US$337.2m in cash and US$8.19m in receivables that were due within 12 months. So it can boast US$231.6m more liquid assets than total liabilities.
This surplus suggests that Inovio Pharmaceuticals has a conservative balance sheet, and could probably eliminate its debt without much difficulty. Simply put, the fact that Inovio Pharmaceuticals 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 Inovio Pharmaceuticals 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.
In the last year Inovio Pharmaceuticals had a loss before interest and tax, and actually shrunk its revenue by 67%, to US$2.1m. To be frank that doesn't bode well.
So How Risky Is Inovio Pharmaceuticals?
Statistically speaking companies that lose money are riskier than those that make money. And the fact is that over the last twelve months Inovio Pharmaceuticals lost money at the earnings before interest and tax (EBIT) line. Indeed, in that time it burnt through US$141m of cash and made a loss of US$180m. While this does make the company a bit risky, it's important to remember it has net cash of US$283.5m. That kitty means the company can keep spending for growth for at least two years, at current rates. 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. For instance, we've identified 4 warning signs for Inovio Pharmaceuticals (1 shouldn't be ignored) you should be aware of.
When all is said and done, sometimes its easier to focus on companies that don't even need debt. Readers can access a list of growth stocks with zero net debt 100% free, right now.
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