Is Replimune Group (NASDAQ:REPL) Using Debt In A Risky Way?

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.' 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. We note that Replimune Group, Inc. (NASDAQ:REPL) does have debt on its balance sheet. But should shareholders be worried about its use of debt?

When Is Debt Dangerous?

Debt assists a business until the business has trouble paying it off, either with new capital or with free cash flow. Ultimately, if the company can't fulfill its legal obligations to repay debt, shareholders could walk away with nothing. 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. Of course, plenty of companies use debt to fund growth, without any negative consequences. When we examine debt levels, we first consider both cash and debt levels, together.

Check out our latest analysis for Replimune Group

How Much Debt Does Replimune Group Carry?

You can click the graphic below for the historical numbers, but it shows that as of December 2022 Replimune Group had US$28.4m of debt, an increase on none, over one year. But it also has US$616.4m in cash to offset that, meaning it has US$588.0m net cash.

How Healthy Is Replimune Group's Balance Sheet?

Zooming in on the latest balance sheet data, we can see that Replimune Group had liabilities of US$26.5m due within 12 months and liabilities of US$56.7m due beyond that. Offsetting these obligations, it had cash of US$616.4m as well as receivables valued at US$2.00m due within 12 months. So it actually has US$535.2m more liquid assets than total liabilities.

This surplus liquidity suggests that Replimune Group'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, Replimune Group boasts net cash, so it's fair to say it does not have a heavy debt load! There's no doubt that we learn most about debt from the balance sheet. But it is future earnings, more than anything, that will determine Replimune Group's ability to maintain a healthy balance sheet going forward. So if you want to see what the professionals think, you might find this free report on analyst profit forecasts to be interesting.

Since Replimune Group doesn't have significant operating revenue, shareholders may be hoping it comes up with a great new product, before it runs out of money.

So How Risky Is Replimune Group?

We have no doubt that loss making companies are, in general, riskier than profitable ones. And in the last year Replimune Group had an earnings before interest and tax (EBIT) loss, truth be told. Indeed, in that time it burnt through US$121m of cash and made a loss of US$157m. But at least it has US$588.0m on the balance sheet to spend on growth, near-term. 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 Replimune Group has 3 warning signs (and 1 which can't be ignored) we think 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.

Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team (at) simplywallst.com.

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.