Howard Marks put it nicely when he said that, rather than worrying about share price volatility, 'The possibility of permanent loss is the risk I worry about... and every practical investor I know worries about.' It's only natural to consider a company's balance sheet when you examine how risky it is, since debt is often involved when a business collapses. Importantly, uniQure N.V. (NASDAQ:QURE) does carry debt. But is this debt a concern to shareholders?
When Is Debt Dangerous?
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. While that is not too common, we often do see indebted companies permanently diluting shareholders because lenders force them to raise capital at a distressed price. By replacing dilution, though, debt can be an extremely good tool for businesses that need capital to invest in growth at high rates of return. When we think about a company's use of debt, we first look at cash and debt together.
What Is uniQure's Debt?
As you can see below, uniQure had US$35.5m of debt, at September 2020, which is about the same as the year before. You can click the chart for greater detail. But it also has US$279.5m in cash to offset that, meaning it has US$244.0m net cash.
How Strong Is uniQure's Balance Sheet?
The latest balance sheet data shows that uniQure had liabilities of US$33.4m due within a year, and liabilities of US$89.3m falling due after that. Offsetting this, it had US$279.5m in cash and US$223.0k in receivables that were due within 12 months. So it can boast US$157.1m more liquid assets than total liabilities.
This short term liquidity is a sign that uniQure could probably pay off its debt with ease, as its balance sheet is far from stretched. Simply put, the fact that uniQure has more cash than debt is arguably a good indication that it can manage its debt safely. 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 uniQure 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.
Over 12 months, uniQure made a loss at the EBIT level, and saw its revenue drop to US$6.1m, which is a fall of 3.5%. That's not what we would hope to see.
So How Risky Is uniQure?
By their very nature companies that are losing money are more risky than those with a long history of profitability. And we do note that uniQure had an earnings before interest and tax (EBIT) loss, over the last year. Indeed, in that time it burnt through US$132m of cash and made a loss of US$166m. While this does make the company a bit risky, it's important to remember it has net cash of US$244.0m. That kitty means the company can keep spending for growth for at least two years, at current rates. 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 example, we've discovered 4 warning signs for uniQure (1 is concerning!) that you should be aware of before investing here.
If you're interested in investing in businesses that can grow profits without the burden of debt, then check out this free list of growing businesses that have net cash on the balance sheet.
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What are the risks and opportunities for uniQure?
Trading at 89.1% below our estimate of its fair value
Revenue is forecast to grow 37.82% per year
Significant insider selling 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. 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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