Howard Marks put it nicely when he said that, rather than worrying about share price volatility, ‘The possibility of permanent loss is the risk I worry about… and every practical investor I know worries about.’ When we think about how risky a company is, we always like to look at its use of debt, since debt overload can lead to ruin. As with many other companies XOMA Corporation (NASDAQ:XOMA) makes use of debt. But the real question is whether this debt is making the company risky.
Why Does Debt Bring Risk?
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. While that is not too common, we often do see indebted companies permanently diluting shareholders because lenders force them to raise capital at a distressed price. Of course, debt can be an important tool in businesses, particularly capital heavy businesses. The first thing to do when considering how much debt a business uses is to look at its cash and debt together.
How Much Debt Does XOMA Carry?
As you can see below, at the end of June 2019, XOMA had US$26.0m of debt, up from US$14.9m a year ago. Click the image for more detail. But on the other hand it also has US$42.3m in cash, leading to a US$16.3m net cash position.
How Strong Is XOMA’s Balance Sheet?
We can see from the most recent balance sheet that XOMA had liabilities of US$11.7m falling due within a year, and liabilities of US$45.7m due beyond that. Offsetting this, it had US$42.3m in cash and US$2.58m in receivables that were due within 12 months. So its liabilities outweigh the sum of its cash and (near-term) receivables by US$12.4m.
Of course, XOMA has a market capitalization of US$146.0m, so these liabilities are probably manageable. Having said that, it’s clear that we should continue to monitor its balance sheet, lest it change for the worse. While it does have liabilities worth noting, XOMA 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 ultimately the future profitability of the business will decide if XOMA 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.
In the last year XOMA actually shrunk its revenue by 74%, to US$12m. To be frank that doesn’t bode well.
So How Risky Is XOMA?
We have no doubt that loss making companies are, in general, riskier than profitable ones. And the fact is that over the last twelve months XOMA lost money at the earnings before interest and tax (EBIT) line. Indeed, in that time it burnt through US$21m of cash and made a loss of US$8.4m. But at least it has US$42m 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. For riskier companies like XOMA 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.
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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