Health Check: How Prudently Does XOMA Royalty (NASDAQ:XOMA) Use Debt?

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.' 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, XOMA Royalty Corporation (NASDAQ:XOMA) does carry debt. But the more important question is: how much risk is that debt creating?

When Is Debt A Problem?

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. 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. Of course, the upside of debt is that it often represents cheap capital, especially when it replaces dilution in a company with the ability to reinvest at high rates of return. When we examine debt levels, we first consider both cash and debt levels, together.

See our latest analysis for XOMA Royalty

How Much Debt Does XOMA Royalty Carry?

You can click the graphic below for the historical numbers, but it shows that as of March 2024 XOMA Royalty had US$120.7m of debt, an increase on none, over one year. However, it does have US$136.6m in cash offsetting this, leading to net cash of US$16.0m.

How Strong Is XOMA Royalty's Balance Sheet?

According to the last reported balance sheet, XOMA Royalty had liabilities of US$15.5m due within 12 months, and liabilities of US$121.5m due beyond 12 months. On the other hand, it had cash of US$136.6m and US$9.82m worth of receivables due within a year. So it actually has US$9.38m more liquid assets than total liabilities.

This short term liquidity is a sign that XOMA Royalty could probably pay off its debt with ease, as its balance sheet is far from stretched. Succinctly put, XOMA Royalty 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 XOMA Royalty's ability to maintain a healthy balance sheet going forward. So if you're focused on the future you can check out this free report showing analyst profit forecasts.

In the last year XOMA Royalty wasn't profitable at an EBIT level, but managed to grow its revenue by 73%, to US$5.8m. Shareholders probably have their fingers crossed that it can grow its way to profits.

So How Risky Is XOMA Royalty?

By their very nature companies that are losing money are more risky than those with a long history of profitability. And the fact is that over the last twelve months XOMA Royalty lost money at the earnings before interest and tax (EBIT) line. And over the same period it saw negative free cash outflow of US$13m and booked a US$45m accounting loss. While this does make the company a bit risky, it's important to remember it has net cash of US$16.0m. That means it could keep spending at its current rate for more than two years. With very solid revenue growth in the last year, XOMA Royalty may be on a path to profitability. Pre-profit companies are often risky, but they can also offer great rewards. There's no doubt that we learn most about debt from the balance sheet. But ultimately, every company can contain risks that exist outside of the balance sheet. Be aware that XOMA Royalty is showing 1 warning sign in our investment analysis , you should know about...

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.

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