Does XOMA (NASDAQ:XOMA) Have A Healthy Balance Sheet?

The external fund manager backed by Berkshire Hathaway's Charlie Munger, Li Lu, makes no bones about it when he says '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. We note that XOMA Corporation (NASDAQ:XOMA) does have debt on its balance sheet. But the real question is whether this debt is making the company risky.

What Risk Does Debt Bring?

Debt assists a business until the business has trouble paying it off, either with new capital or with free cash flow. If things get really bad, the lenders can take control of the business. However, a more common (but still painful) scenario is that it has to raise new equity capital at a low price, thus permanently diluting shareholders. Of course, debt can be an important tool in businesses, particularly capital heavy businesses. When we examine debt levels, we first consider both cash and debt levels, together.

View our latest analysis for XOMA

What Is XOMA's Net Debt?

The image below, which you can click on for greater detail, shows that XOMA had debt of US$18.9m at the end of March 2021, a reduction from US$31.5m over a year. But on the other hand it also has US$67.8m in cash, leading to a US$49.0m net cash position.

How Strong Is XOMA's Balance Sheet?

Zooming in on the latest balance sheet data, we can see that XOMA had liabilities of US$13.1m due within 12 months and liabilities of US$25.1m due beyond that. Offsetting this, it had US$67.8m in cash and US$80.0k in receivables that were due within 12 months. So it actually has US$29.7m more liquid assets than total liabilities.

This surplus suggests that XOMA has a conservative balance sheet, and could probably eliminate its debt without much difficulty. Simply put, the fact that XOMA has more cash than debt is arguably a good indication that it can manage its debt safely.

It was also good to see that despite losing money on the EBIT line last year, XOMA turned things around in the last 12 months, delivering and EBIT of US$12m. 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 can strengthen its balance sheet over time. So if you're focused on the future you can check out this free report showing analyst profit forecasts.

But our final consideration is also important, because a company cannot pay debt with paper profits; it needs cold hard cash. While XOMA has net cash on its balance sheet, it's still worth taking a look at its ability to convert earnings before interest and tax (EBIT) to free cash flow, to help us understand how quickly it is building (or eroding) that cash balance. Over the last year, XOMA recorded negative free cash flow, in total. Debt is usually more expensive, and almost always more risky in the hands of a company with negative free cash flow. Shareholders ought to hope for an improvement.

Summing up

While we empathize with investors who find debt concerning, you should keep in mind that XOMA has net cash of US$49.0m, as well as more liquid assets than liabilities. So we are not troubled with XOMA's debt use. When analysing debt levels, the balance sheet is the obvious place to start. However, not all investment risk resides within the balance sheet - far from it. For instance, we've identified 3 warning signs for XOMA (1 is a bit unpleasant) you should be aware of.

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. 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.
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