Legendary fund manager Li Lu (who Charlie Munger backed) once said, '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. Importantly, INmune Bio, Inc. (NASDAQ:INMB) does carry debt. 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. 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 INmune Bio's Debt?
You can click the graphic below for the historical numbers, but it shows that as of March 2022 INmune Bio had US$14.5m of debt, an increase on none, over one year. However, its balance sheet shows it holds US$66.7m in cash, so it actually has US$52.2m net cash.
How Strong Is INmune Bio's Balance Sheet?
We can see from the most recent balance sheet that INmune Bio had liabilities of US$3.23m falling due within a year, and liabilities of US$15.5m due beyond that. Offsetting these obligations, it had cash of US$66.7m as well as receivables valued at US$5.65m due within 12 months. So it can boast US$53.7m more liquid assets than total liabilities.
This excess liquidity is a great indication that INmune Bio's balance sheet is almost as strong as Fort Knox. On this view, lenders should feel as safe as the beloved of a black-belt karate master. Succinctly put, INmune Bio 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 ultimately the future profitability of the business will decide if INmune Bio 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.
Given its lack of meaningful operating revenue, INmune Bio shareholders no doubt hope it can fund itself until it has a profitable product.
So How Risky Is INmune Bio?
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 INmune Bio had an earnings before interest and tax (EBIT) loss, over the last year. Indeed, in that time it burnt through US$32m of cash and made a loss of US$33m. But at least it has US$52.2m on the balance sheet to spend on growth, near-term. The good news for shareholders is that INmune Bio has dazzling revenue growth, so there's a very good chance it can boost its free cash flow in the years to come. High growth pre-profit companies may well be risky, but they can also offer great rewards. The balance sheet is clearly the area to focus on when you are analysing debt. However, not all investment risk resides within the balance sheet - far from it. For instance, we've identified 5 warning signs for INmune Bio (3 don't sit too well with us) you should be aware of.
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.
Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team (at) simplywallst.com.
This article by Simply Wall St is general in nature. We provide commentary based on historical data and analyst forecasts only using an unbiased methodology and our articles are not intended to be financial advice. 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.
The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.
