Legendary fund manager Li Lu (who Charlie Munger backed) once said, 'The biggest investment risk is not the volatility of prices, but whether you will suffer a permanent loss of capital.' 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. Importantly, uniQure N.V. (NASDAQ:QURE) does carry debt. But the real question is whether this debt is making the company risky.
When Is Debt A Problem?
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. Ultimately, if the company can't fulfill its legal obligations to repay debt, shareholders could walk away with nothing. 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. Of course, debt can be an important tool in businesses, particularly capital heavy businesses. When we think about a company's use of debt, we first look at cash and debt together.
What Is uniQure's Debt?
The image below, which you can click on for greater detail, shows that at June 2021 uniQure had debt of US$70.8m, up from US$35.4m in one year. However, its balance sheet shows it holds US$677.3m in cash, so it actually has US$606.6m net cash.
A Look At uniQure's Liabilities
Zooming in on the latest balance sheet data, we can see that uniQure had liabilities of US$46.1m due within 12 months and liabilities of US$104.6m due beyond that. Offsetting these obligations, it had cash of US$677.3m as well as receivables valued at US$2.71m due within 12 months. So it actually has US$529.4m more liquid assets than total liabilities.
This surplus liquidity suggests that uniQure's balance sheet could take a hit just as well as Homer Simpson's head can take a punch. With this in mind one could posit that its balance sheet means the company is able to handle some adversity. Succinctly put, uniQure boasts net cash, so it's fair to say it does not have a heavy debt load!
Although uniQure made a loss at the EBIT level, last year, it was also good to see that it generated US$296m in EBIT over the last twelve months. 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.
Finally, while the tax-man may adore accounting profits, lenders only accept cold hard cash. While uniQure has net cash on its balance sheet, it's still worth taking a look at its ability to convert earnings before interest and tax (EBIT) to free cash flow, to help us understand how quickly it is building (or eroding) that cash balance. During the last year, uniQure generated free cash flow amounting to a very robust 99% of its EBIT, more than we'd expect. That positions it well to pay down debt if desirable to do so.
While we empathize with investors who find debt concerning, you should keep in mind that uniQure has net cash of US$606.6m, as well as more liquid assets than liabilities. And it impressed us with free cash flow of US$292m, being 99% of its EBIT. So is uniQure's debt a risk? It doesn't seem so to us. There's no doubt that we learn most about debt from the balance sheet. But ultimately, every company can contain risks that exist outside of the balance sheet. These risks can be hard to spot. Every company has them, and we've spotted 4 warning signs for uniQure (of which 1 makes us a bit uncomfortable!) you should know about.
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.
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. 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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