Is Inovio Pharmaceuticals (NASDAQ:INO) Using Debt Sensibly?

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. Importantly, Inovio Pharmaceuticals, Inc. (NASDAQ:INO) does carry debt. But the more important question is: how much risk is that debt creating?

What Risk Does Debt Bring?

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. Ultimately, if the company can't fulfill its legal obligations to repay debt, shareholders could walk away with nothing. 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. 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.

See our latest analysis for Inovio Pharmaceuticals

What Is Inovio Pharmaceuticals's Net Debt?

The image below, which you can click on for greater detail, shows that at June 2022 Inovio Pharmaceuticals had debt of US$16.5m, up from US$14.5m in one year. However, it does have US$348.1m in cash offsetting this, leading to net cash of US$331.6m.

A Look At Inovio Pharmaceuticals' Liabilities

We can see from the most recent balance sheet that Inovio Pharmaceuticals had liabilities of US$131.1m falling due within a year, and liabilities of US$30.7m due beyond that. On the other hand, it had cash of US$348.1m and US$11.4m worth of receivables due within a year. So it actually has US$197.8m more liquid assets than total liabilities.

This excess liquidity is a great indication that Inovio Pharmaceuticals' balance sheet is almost as strong as Fort Knox. Having regard to this fact, we think its balance sheet is as strong as an ox. 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 it is future earnings, more than anything, that will determine Inovio Pharmaceuticals's ability to maintain a healthy balance sheet going forward. So if you want to see what the professionals think, you might find this free report on analyst profit forecasts to be interesting.

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 we do note that Inovio Pharmaceuticals had an earnings before interest and tax (EBIT) loss, over the last year. Indeed, in that time it burnt through US$198m of cash and made a loss of US$355m. While this does make the company a bit risky, it's important to remember it has net cash of US$331.6m. 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. 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. We've identified 4 warning signs with Inovio Pharmaceuticals , and understanding them should be part of your investment process.

Of course, if you're the type of investor who prefers buying stocks without the burden of debt, then don't hesitate to discover our exclusive list of net cash growth stocks, today.

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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.