Some say volatility, rather than debt, is the best way to think about risk as an investor, but Warren Buffett famously said that ‘Volatility is far from synonymous with risk.’ 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. Importantly, HOOKIPA Pharma Inc. (NASDAQ:HOOK) does carry debt. But the more important question is: how much risk is that debt creating?
Why Does Debt Bring Risk?
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. 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. When we think about a company’s use of debt, we first look at cash and debt together.
What Is HOOKIPA Pharma’s Debt?
The chart below, which you can click on for greater detail, shows that HOOKIPA Pharma had US$4.54m in debt in December 2020; about the same as the year before. However, its balance sheet shows it holds US$142.7m in cash, so it actually has US$138.2m net cash.
NasdaqGS:HOOK Debt to Equity History April 20th 2021
A Look At HOOKIPA Pharma’s Liabilities
We can see from the most recent balance sheet that HOOKIPA Pharma had liabilities of US$21.1m falling due within a year, and liabilities of US$10.6m due beyond that. Offsetting these obligations, it had cash of US$142.7m as well as receivables valued at US$20.7m due within 12 months. So it can boast US$131.7m more liquid assets than total liabilities.
This luscious liquidity implies that HOOKIPA Pharma’s balance sheet is sturdy like a giant sequoia tree. On this view, lenders should feel as safe as the beloved of a black-belt karate master. Succinctly put, HOOKIPA Pharma boasts net cash, so it’s fair to say it does not have a heavy debt load! The balance sheet is clearly the area to focus on when you are analysing debt. But it is future earnings, more than anything, that will determine HOOKIPA Pharma’s ability to maintain a healthy balance sheet going forward. So if you’re focused on the future you can check out this free report showing analyst profit forecasts.
Over 12 months, HOOKIPA Pharma reported revenue of US$20m, which is a gain of 64%, although it did not report any earnings before interest and tax. With any luck the company will be able to grow its way to profitability.
So How Risky Is HOOKIPA Pharma?
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 HOOKIPA Pharma lost money at the earnings before interest and tax (EBIT) line. And over the same period it saw negative free cash outflow of US$42m and booked a US$44m accounting loss. But the saving grace is the US$138.2m on the balance sheet. That kitty means the company can keep spending for growth for at least two years, at current rates. With very solid revenue growth in the last year, HOOKIPA Pharma may be on a path to profitability. Pre-profit companies are often risky, but they can also offer great rewards. 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 example HOOKIPA Pharma has 3 warning signs (and 1 which makes us a bit uncomfortable) we think you should know about.
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.
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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