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.' 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?
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. Part and parcel of capitalism is the process of 'creative destruction' where failed businesses are mercilessly liquidated by their bankers. However, a more usual (but still expensive) situation is where a company must dilute shareholders at a cheap share price simply to get debt under control. Having said that, the most common situation is where a company manages its debt reasonably well - and to its own advantage. The first step when considering a company's debt levels is to consider its cash and debt together.
What Is Iterum Therapeutics's Net Debt?
As you can see below, Iterum Therapeutics had US$35.8m of debt, at March 2021, which is about the same as the year before. You can click the chart for greater detail. However, its balance sheet shows it holds US$100.5m in cash, so it actually has US$64.7m net cash.
A Look At Iterum Therapeutics' Liabilities
The latest balance sheet data shows that Iterum Therapeutics had liabilities of US$43.8m due within a year, and liabilities of US$39.8m falling due after that. Offsetting this, it had US$100.5m in cash and US$865.0k in receivables that were due within 12 months. So it can boast US$17.7m more liquid assets than total liabilities.
This short term liquidity is a sign that Iterum Therapeutics could probably pay off its debt with ease, as its balance sheet is far from stretched. 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. And over the same period it saw negative free cash outflow of US$28m and booked a US$135m accounting loss. Given it only has net cash of US$64.7m, the company may need to raise more capital if it doesn't reach break-even 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. When analysing debt levels, the balance sheet is the obvious place to start. However, not all investment risk resides within the balance sheet - far from it. Be aware that Iterum Therapeutics is showing 4 warning signs in our investment analysis , and 2 of those are concerning...
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
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