Warren Buffett famously said, 'Volatility is far from synonymous with risk.' So it seems the smart money knows that debt - which is usually involved in bankruptcies - is a very important factor, when you assess how risky a company is. We note that Iterum Therapeutics plc (NASDAQ:ITRM) does have debt on its balance sheet. But the more important question is: how much risk is that debt creating?
When Is Debt A Problem?
Generally speaking, debt only becomes a real problem when a company can't easily pay it off, either by raising capital or with its own cash flow. 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. Of course, plenty of companies use debt to fund growth, without any negative consequences. The first step when considering a company's debt levels is to consider its cash and debt together.
What Is Iterum Therapeutics's Debt?
As you can see below, Iterum Therapeutics had US$27.8m of debt at September 2021, down from US$40.3m a year prior. But it also has US$88.0m in cash to offset that, meaning it has US$60.2m net cash.
How Strong Is Iterum Therapeutics' Balance Sheet?
The latest balance sheet data shows that Iterum Therapeutics had liabilities of US$17.8m due within a year, and liabilities of US$28.1m falling due after that. Offsetting this, it had US$88.0m in cash and US$1.03m in receivables that were due within 12 months. So it can boast US$43.1m more liquid assets than total liabilities.
This luscious liquidity implies that Iterum Therapeutics' balance sheet is sturdy like a giant sequoia tree. Having regard to this fact, we think its balance sheet is as strong as an ox. Succinctly put, Iterum Therapeutics boasts net cash, so it's fair to say it does not have a heavy debt load! When analysing debt levels, the balance sheet is the obvious place to start. But ultimately the future profitability of the business will decide if Iterum 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.
It seems likely shareholders hope that Iterum Therapeutics can significantly advance the business plan before too long, because it doesn't have any significant revenue at the moment.
So How Risky Is Iterum Therapeutics?
We have no doubt that loss making companies are, in general, riskier than profitable ones. And in the last year Iterum Therapeutics had an earnings before interest and tax (EBIT) loss, truth be told. Indeed, in that time it burnt through US$22m of cash and made a loss of US$99m. Given it only has net cash of US$60.2m, the company may need to raise more capital if it doesn't reach break-even soon. 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. 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 example, we've discovered 5 warning signs for Iterum Therapeutics (2 are significant!) that you should be aware of before investing here.
At the end of the day, it's often better to focus on companies that are free from net debt. You can access our special list of such companies (all with a track record of profit growth). It's free.
What are the risks and opportunities for Iterum Therapeutics?
Revenue is forecast to grow 75.6% per year
Earnings have grown 0.6% per year over the past 5 years
Earnings are forecast to decline by an average of 3.3% per year for the next 3 years
Makes less than USD$1m in revenue ($0)
Does not have a meaningful market cap ($18M)
Volatile share price over the past 3 months
Currently unprofitable and not forecast to become profitable over the next 3 years
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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.