David Iben put it well when he said, 'Volatility is not a risk we care about. What we care about is avoiding the permanent loss of capital.' 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, Inovio Pharmaceuticals, Inc. (NASDAQ:INO) does carry debt. But the more important question is: how much risk is that debt creating?
When Is Debt A Problem?
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. Part and parcel of capitalism is the process of 'creative destruction' where failed businesses are mercilessly liquidated by their bankers. However, a more common (but still painful) scenario is that it has to raise new equity capital at a low price, thus permanently diluting shareholders. Having said that, the most common situation is where a company manages its debt reasonably well - and to its own advantage. When we examine debt levels, we first consider both cash and debt levels, together.
How Much Debt Does Inovio Pharmaceuticals Carry?
You can click the graphic below for the historical numbers, but it shows that as of June 2020 Inovio Pharmaceuticals had US$79.6m of debt, an increase on US$62.8m, over one year. However, its balance sheet shows it holds US$371.7m in cash, so it actually has US$292.1m net cash.
How Strong Is Inovio Pharmaceuticals's Balance Sheet?
Zooming in on the latest balance sheet data, we can see that Inovio Pharmaceuticals had liabilities of US$38.0m due within 12 months and liabilities of US$218.8m due beyond that. Offsetting these obligations, it had cash of US$371.7m as well as receivables valued at US$4.00m due within 12 months. So it actually has US$118.8m 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. Succinctly put, Inovio Pharmaceuticals boasts net cash, so it's fair to say it does not have a heavy debt load! The balance sheet is clearly the area to focus on when you are analysing debt. But ultimately the future profitability of the business will decide if Inovio Pharmaceuticals 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.
In the last year Inovio Pharmaceuticals had a loss before interest and tax, and actually shrunk its revenue by 63%, to US$2.7m. To be frank that doesn't bode well.
So How Risky Is Inovio Pharmaceuticals?
By their very nature companies that are losing money are more risky than those with a long history of profitability. And we do note that Inovio Pharmaceuticals had an earnings before interest and tax (EBIT) loss, over the last year. And over the same period it saw negative free cash outflow of US$94m and booked a US$222m accounting loss. While this does make the company a bit risky, it's important to remember it has net cash of US$292.1m. That means it could keep spending at its current rate for more than two years. 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. The balance sheet is clearly the area to focus on when you are analysing debt. However, not all investment risk resides within the balance sheet - far from it. For example, we've discovered 4 warning signs for Inovio Pharmaceuticals (1 is a bit unpleasant!) that you should be aware of before investing here.
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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