Replimune Group (NASDAQ:REPL) Has Debt But No Earnings; Should You Worry?

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.' 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?

What Risk Does Debt Bring?

Generally speaking, debt only becomes a real problem when a company can't easily pay it off, either by raising capital or with its own cash flow. If things get really bad, the lenders can take control of the business. 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.

See our latest analysis for Replimune Group

What Is Replimune Group's Debt?

The image below, which you can click on for greater detail, shows that at March 2022 Replimune Group had debt of US$32.8m, up from none in one year. But it also has US$395.7m in cash to offset that, meaning it has US$362.8m net cash.

How Strong Is Replimune Group's Balance Sheet?

According to the last reported balance sheet, Replimune Group had liabilities of US$20.8m due within 12 months, and liabilities of US$29.2m due beyond 12 months. Offsetting this, it had US$395.7m in cash and US$5.06m in receivables that were due within 12 months. So it actually has US$350.7m 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. On this view, lenders should feel as safe as the beloved of a black-belt karate master. Simply put, the fact that Replimune Group 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 Replimune Group 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.

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 the fact is that over the last twelve months Replimune Group lost money at the earnings before interest and tax (EBIT) line. And over the same period it saw negative free cash outflow of US$85m and booked a US$133m accounting loss. But at least it has US$362.8m 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. There's no doubt that we learn most about debt from the balance sheet. However, not all investment risk resides within the balance sheet - far from it. For instance, we've identified 4 warning signs for Replimune Group (1 is 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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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.