Is X4 Pharmaceuticals (NASDAQ:XFOR) A Risky Investment?

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.' So it seems the smart money knows that debt - which is usually involved in bankruptcies - is a very important factor, when you assess how risky a company is. We can see that X4 Pharmaceuticals, Inc. (NASDAQ:XFOR) does use debt in its business. But is this debt a concern to shareholders?

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. In the worst case scenario, a company can go bankrupt if it cannot pay its creditors. However, a more frequent (but still costly) occurrence is where a company must issue shares at bargain-basement prices, permanently diluting shareholders, just to shore up its balance sheet. Of course, debt can be an important tool in businesses, particularly capital heavy businesses. The first thing to do when considering how much debt a business uses is to look at its cash and debt together.

Check out our latest analysis for X4 Pharmaceuticals

How Much Debt Does X4 Pharmaceuticals Carry?

The chart below, which you can click on for greater detail, shows that X4 Pharmaceuticals had US$33.6m in debt in December 2022; about the same as the year before. However, its balance sheet shows it holds US$121.7m in cash, so it actually has US$88.1m net cash.

How Strong Is X4 Pharmaceuticals' Balance Sheet?

We can see from the most recent balance sheet that X4 Pharmaceuticals had liabilities of US$22.3m falling due within a year, and liabilities of US$59.2m due beyond that. On the other hand, it had cash of US$121.7m and US$1.15m worth of receivables due within a year. So it can boast US$41.3m more liquid assets than total liabilities.

This excess liquidity suggests that X4 Pharmaceuticals is taking a careful approach to debt. Given it has easily adequate short term liquidity, we don't think it will have any issues with its lenders. Succinctly put, X4 Pharmaceuticals 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 it is future earnings, more than anything, that will determine X4 Pharmaceuticals'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 X4 Pharmaceuticals 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 X4 Pharmaceuticals?

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 X4 Pharmaceuticals lost money at the earnings before interest and tax (EBIT) line. And over the same period it saw negative free cash outflow of US$77m and booked a US$96m accounting loss. However, it has net cash of US$88.1m, so it has a bit of time before it will need more capital. 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. When analysing debt levels, the balance sheet is the obvious place to start. But ultimately, every company can contain risks that exist outside of the balance sheet. Case in point: We've spotted 4 warning signs for X4 Pharmaceuticals you should be aware of, and 2 of them shouldn't be ignored.

At the end of the day, it's often better to focus on companies that are free from net debt. You can access our special list of such companies (all with a track record of profit growth). It's free.

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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.