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 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. As with many other companies XOMA Corporation (NASDAQ:XOMA) makes use of debt. But the more important question is: how much risk is that debt creating?
When Is Debt Dangerous?
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. 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. Having said that, the most common situation is where a company manages its debt reasonably well – and to its own advantage. When we think about a company’s use of debt, we first look at cash and debt together.
View our latest analysis for XOMA
How Much Debt Does XOMA Carry?
As you can see below, at the end of June 2020, XOMA had US$31.1m of debt, up from US$26.0m a year ago. Click the image for more detail. But it also has US$49.5m in cash to offset that, meaning it has US$18.4m net cash.
A Look At XOMA’s Liabilities
Zooming in on the latest balance sheet data, we can see that XOMA had liabilities of US$11.3m due within 12 months and liabilities of US$38.2m due beyond that. On the other hand, it had cash of US$49.5m and US$1.94m worth of receivables due within a year. So it actually has US$1.97m more liquid assets than total liabilities.
This state of affairs indicates that XOMA’s 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$217.3m company is short on cash, but still worth keeping an eye on the balance sheet. Simply put, the fact that XOMA has more cash than debt is arguably a good indication that it can manage its debt safely. When analysing debt levels, the balance sheet is the obvious place to start. 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.
Over 12 months, XOMA made a loss at the EBIT level, and saw its revenue drop to US$11m, which is a fall of 11%. That’s not what we would hope to see.
So How Risky Is XOMA?
By their very nature companies that are losing money are more risky than those with a long history of profitability. And we do note that XOMA had an earnings before interest and tax (EBIT) loss, over the last year. Indeed, in that time it burnt through US$18.5m of cash and made a loss of US$9.4m. However, it has net cash of US$18.4m, 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. To that end, you should be aware of the 1 warning sign we’ve spotted with XOMA .
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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