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.' 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. We note that Iterum Therapeutics plc (NASDAQ:ITRM) does have debt on its balance sheet. 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. Of course, plenty of companies use debt to fund growth, without any negative consequences. When we examine debt levels, we first consider both cash and debt levels, together.
What Is Iterum Therapeutics's Debt?
You can click the graphic below for the historical numbers, but it shows that Iterum Therapeutics had US$26.5m of debt in December 2021, down from US$42.3m, one year before. But it also has US$81.4m in cash to offset that, meaning it has US$54.9m net cash.
A Look At Iterum Therapeutics' Liabilities
The latest balance sheet data shows that Iterum Therapeutics had liabilities of US$12.9m due within a year, and liabilities of US$28.3m falling due after that. Offsetting this, it had US$81.4m in cash and US$1.21m in receivables that were due within 12 months. So it can boast US$41.3m more liquid assets than total liabilities.
This surplus liquidity suggests that Iterum Therapeutics' balance sheet could take a hit just as well as Homer Simpson's head can take a punch. 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! The balance sheet is clearly the area to focus on when you are analysing debt. But it is future earnings, more than anything, that will determine Iterum Therapeutics's ability to maintain a healthy balance sheet going forward. So if you're focused on the future you can check out this free report showing analyst profit forecasts.
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$16m of cash and made a loss of US$92m. With only US$54.9m on the balance sheet, it would appear that its going to need to raise capital again 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. We've identified 5 warning signs with Iterum Therapeutics (at least 1 which shouldn't be ignored) , 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.
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.