Is XBiotech (NASDAQ:XBIT) Weighed On By Its Debt Load?

David Iben put it well when he said, 'Volatility is not a risk we care about. What we care about is avoiding the 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 XBiotech Inc. (NASDAQ:XBIT) does have debt on its balance sheet. But should shareholders be worried about its use of debt?

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. 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 thing to do when considering how much debt a business uses is to look at its cash and debt together.

See our latest analysis for XBiotech

What Is XBiotech's Debt?

You can click the graphic below for the historical numbers, but it shows that as of June 2024 XBiotech had US$10.0m of debt, an increase on none, over one year. However, its balance sheet shows it holds US$188.5m in cash, so it actually has US$178.5m net cash.

How Healthy Is XBiotech's Balance Sheet?

The latest balance sheet data shows that XBiotech had liabilities of US$17.1m due within a year, and liabilities of US$1.72m falling due after that. Offsetting this, it had US$188.5m in cash and US$993.0k in receivables that were due within 12 months. So it actually has US$170.7m more liquid assets than total liabilities.

This excess liquidity is a great indication that XBiotech's balance sheet is almost as strong as Fort Knox. Having regard to this fact, we think its balance sheet is as strong as an ox. Succinctly put, XBiotech boasts net cash, so it's fair to say it does not have a heavy debt load! When analysing debt levels, the balance sheet is the obvious place to start. But you can't view debt in total isolation; since XBiotech will need earnings to service that debt. So when considering debt, it's definitely worth looking at the earnings trend. Click here for an interactive snapshot.

Given its lack of meaningful operating revenue, XBiotech shareholders no doubt hope it can fund itself until it has a profitable product.

So How Risky Is XBiotech?

Statistically speaking companies that lose money are riskier than those that make money. And in the last year XBiotech 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$25m and booked a US$35m accounting loss. While this does make the company a bit risky, it's important to remember it has net cash of US$178.5m. That kitty means the company can keep spending for growth for at least two years, at current rates. 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. 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. We've identified 3 warning signs with XBiotech (at least 2 which can't be ignored) , and understanding them should be part of your investment process.

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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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.