XOMA Royalty (NASDAQ:XOMA) Is Making Moderate Use Of 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 might be obvious that you need to consider debt, when you think about how risky any given stock is, because too much debt can sink a company. As with many other companies XOMA Royalty Corporation (NASDAQ:XOMA) makes use of debt. But the more important question is: how much risk is that debt creating?

We check all companies for important risks. See what we found for XOMA Royalty in our free report.

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

What Is XOMA Royalty's Debt?

You can click the graphic below for the historical numbers, but it shows that XOMA Royalty had US$118.3m of debt in December 2024, down from US$124.1m, one year before. However, it also had US$105.2m in cash, and so its net debt is US$13.1m.

A Look At XOMA Royalty's Liabilities

The latest balance sheet data shows that XOMA Royalty had liabilities of US$24.4m due within a year, and liabilities of US$115.0m falling due after that. Offsetting these obligations, it had cash of US$105.2m as well as receivables valued at US$17.0m due within 12 months. So its liabilities total US$17.2m more than the combination of its cash and short-term receivables.

Given XOMA Royalty has a market capitalization of US$242.9m, it's hard to believe these liabilities pose much threat. Having said that, it's clear that we should continue to monitor its balance sheet, lest it change for the worse. There's no doubt that we learn most about debt from the balance sheet. But ultimately the future profitability of the business will decide if XOMA Royalty 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.

See our latest analysis for XOMA Royalty

In the last year XOMA Royalty wasn't profitable at an EBIT level, but managed to grow its revenue by 499%, to US$28m. When it comes to revenue growth, that's like nailing the game winning 3-pointer!

Caveat Emptor

Despite the top line growth, XOMA Royalty still had an earnings before interest and tax (EBIT) loss over the last year. Its EBIT loss was a whopping US$36m. Considering that alongside the liabilities mentioned above does not give us much confidence that company should be using so much debt. So we think its balance sheet is a little strained, though not beyond repair. However, it doesn't help that it burned through US$14m of cash over the last year. So in short it's a really risky stock. For riskier companies like XOMA Royalty I always like to keep an eye on the long term profit and revenue trends. Fortunately, you can click to see our interactive graph of its profit, revenue, and operating cashflow.

When all is said and done, sometimes its easier to focus on companies that don't even need debt. Readers can access a list of growth stocks with zero net debt 100% free, right now.

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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.