XOMA (NASDAQ:XOMA) Has Debt But No Earnings; Should You Worry?

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. We note that XOMA Corporation (NASDAQ:XOMA) does have debt on its balance sheet. But is this debt a concern to shareholders?

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. Ultimately, if the company can't fulfill its legal obligations to repay debt, shareholders could walk away with nothing. 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, plenty of companies use debt to fund growth, without any negative consequences. When we think about a company's use of debt, we first look at cash and debt together.

See 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$30.0m at the end of September 2020, a reduction from US$32.7m over a year. However, its balance sheet shows it holds US$45.7m in cash, so it actually has US$15.8m net cash.

How Strong Is XOMA's Balance Sheet?

According to the last reported balance sheet, XOMA had liabilities of US$12.3m due within 12 months, and liabilities of US$35.4m due beyond 12 months. On the other hand, it had cash of US$45.7m and US$1.75m worth of receivables due within a year. So these liquid assets roughly match the total liabilities.

Having regard to XOMA's size, it seems that its liquid assets are well balanced with its total liabilities. So it's very unlikely that the US$492.9m company is short on cash, but still worth keeping an eye on the balance sheet. 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. The balance sheet is clearly the area to focus on when you are analysing debt. 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 had a loss before interest and tax, and actually shrunk its revenue by 89%, to US$2.2m. That makes us nervous, to say the least.

So How Risky Is XOMA?

We have no doubt that loss making companies are, in general, riskier than profitable ones. And in the last year XOMA had an earnings before interest and tax (EBIT) loss, truth be told. Indeed, in that time it burnt through US$12m of cash and made a loss of US$13m. But at least it has US$15.8m on the balance sheet to spend on growth, near-term. Summing up, we're a little skeptical of this one, as it seems fairly risky in the absence of free cashflow. 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. Consider for instance, the ever-present spectre of investment risk. We've identified 3 warning signs with XOMA , and understanding them should be part of your investment process.

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. 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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