Is X4 Pharmaceuticals (NASDAQ:XFOR) Using Too Much Debt?

Some say volatility, rather than debt, is the best way to think about risk as an investor, but Warren Buffett famously said that 'Volatility is far from synonymous with risk.' 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. Importantly, X4 Pharmaceuticals, Inc. (NASDAQ:XFOR) does carry debt. But should shareholders be worried about its use of debt?

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 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. By replacing dilution, though, debt can be an extremely good tool for businesses that need capital to invest in growth at high rates of return. When we think about a company's use of debt, we first look at cash and debt together.

See 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$33.1m in debt in June 2022; about the same as the year before. But it also has US$47.4m in cash to offset that, meaning it has US$14.3m net cash.

A Look At X4 Pharmaceuticals' Liabilities

According to the last reported balance sheet, X4 Pharmaceuticals had liabilities of US$22.0m due within 12 months, and liabilities of US$28.9m due beyond 12 months. On the other hand, it had cash of US$47.4m and US$843.0k worth of receivables due within a year. So it has liabilities totalling US$2.73m more than its cash and near-term receivables, combined.

This state of affairs indicates that X4 Pharmaceuticals' balance sheet looks quite solid, as its total liabilities are just about equal to its liquid assets. So it's very unlikely that the US$151.4m company is short on cash, but still worth keeping an eye on the balance sheet. While it does have liabilities worth noting, X4 Pharmaceuticals also has more cash than debt, so we're pretty confident it can manage its debt safely. 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 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.

Given its lack of meaningful operating revenue, X4 Pharmaceuticals shareholders no doubt hope it can fund itself until it has a profitable product.

So How Risky Is X4 Pharmaceuticals?

Statistically speaking companies that lose money are riskier than those that make money. And we do note that X4 Pharmaceuticals had an earnings before interest and tax (EBIT) loss, over the last year. And over the same period it saw negative free cash outflow of US$72m and booked a US$102m accounting loss. But at least it has US$14.3m on the balance sheet to spend on growth, near-term. Overall, we'd say the stock is a bit risky, and we're usually very cautious until we see 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. These risks can be hard to spot. Every company has them, and we've spotted 5 warning signs for X4 Pharmaceuticals (of which 4 don't sit too well with us!) 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.

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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.