The external fund manager backed by Berkshire Hathaway's Charlie Munger, Li Lu, makes no bones about it when he says 'The biggest investment risk is not the volatility of prices, but whether you will suffer a permanent loss of capital.' When we think about how risky a company is, we always like to look at its use of debt, since debt overload can lead to ruin. As with many other companies Iterum Therapeutics plc (NASDAQ:ITRM) makes use of debt. But the real question is whether this debt is making the company risky.
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. 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, the upside of debt is that it often represents cheap capital, especially when it replaces dilution in a company with the ability to reinvest at high rates of return. The first step when considering a company's debt levels is to consider its cash and debt 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$25.7m of debt in June 2021, down from US$38.7m, one year before. However, its balance sheet shows it holds US$93.7m in cash, so it actually has US$68.0m net cash.
A Look At Iterum Therapeutics' Liabilities
We can see from the most recent balance sheet that Iterum Therapeutics had liabilities of US$34.4m falling due within a year, and liabilities of US$24.5m due beyond that. On the other hand, it had cash of US$93.7m and US$994.0k worth of receivables due within a year. So it can boast US$35.9m 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. 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 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?
By their very nature companies that are losing money are more risky than those with a long history of profitability. And the fact is that over the last twelve months Iterum Therapeutics lost money at the earnings before interest and tax (EBIT) line. And over the same period it saw negative free cash outflow of US$23m and booked a US$115m accounting loss. With only US$68.0m 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. The balance sheet is clearly the area to focus on when you are analysing debt. But ultimately, every company can contain risks that exist outside of the balance sheet. For instance, we've identified 5 warning signs for Iterum Therapeutics (2 are a bit concerning) you should be aware of.
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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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
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.
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