Does Iterum Therapeutics (NASDAQ:ITRM) Have A Healthy Balance Sheet?

Warren Buffett famously said, '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 the real question is whether this debt is making the company risky.

Why Does Debt Bring Risk?

Debt is a tool to help businesses grow, but if a business is incapable of paying off its lenders, then it exists at their mercy. If things get really bad, the lenders can take control of the business. 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. Having said that, the most common situation is where a company manages its debt reasonably well - and to its own advantage. When we think about a company's use of debt, we first look at cash and debt together.

Check out our latest analysis for Iterum Therapeutics

How Much Debt Does Iterum Therapeutics Carry?

You can click the graphic below for the historical numbers, but it shows that Iterum Therapeutics had US$23.6m of debt in June 2022, down from US$25.7m, one year before. But on the other hand it also has US$68.9m in cash, leading to a US$45.3m net cash position.

A Look At Iterum Therapeutics' Liabilities

According to the last reported balance sheet, Iterum Therapeutics had liabilities of US$7.49m due within 12 months, and liabilities of US$25.3m due beyond 12 months. Offsetting this, it had US$68.9m in cash and US$413.0k in receivables that were due within 12 months. So it can boast US$36.5m more liquid assets than total liabilities.

This excess liquidity is a great indication that Iterum Therapeutics' balance sheet is almost as strong as Fort Knox. On this view, lenders should feel as safe as the beloved of a black-belt karate master. Simply put, the fact that Iterum Therapeutics 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 Iterum Therapeutics 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.

Given it has no significant operating revenue at the moment, shareholders will be hoping Iterum Therapeutics can make progress and gain better traction for the business, before it runs low on cash.

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$11m. With only US$45.3m on the balance sheet, it would appear that its going to need to raise capital again soon. 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 instance, we've identified 5 warning signs for Iterum Therapeutics (3 are potentially serious) 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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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.