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.' 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. Importantly, Immunocore Holdings plc (NASDAQ:IMCR) does carry debt. But is this debt a concern to shareholders?
When Is Debt Dangerous?
Debt is a tool to help businesses grow, but if a business is incapable of paying off its lenders, then it exists at their mercy. 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, the upside of debt is that it often represents cheap capital, especially when it replaces dilution in a company with the ability to reinvest at high rates of return. The first step when considering a company's debt levels is to consider its cash and debt together.
What Is Immunocore Holdings's Debt?
You can click the graphic below for the historical numbers, but it shows that as of June 2024 Immunocore Holdings had US$438.1m of debt, an increase on US$48.4m, over one year. But it also has US$859.6m in cash to offset that, meaning it has US$421.5m net cash.
A Look At Immunocore Holdings' Liabilities
We can see from the most recent balance sheet that Immunocore Holdings had liabilities of US$185.1m falling due within a year, and liabilities of US$479.1m due beyond that. Offsetting these obligations, it had cash of US$859.6m as well as receivables valued at US$60.2m due within 12 months. So it can boast US$255.6m more liquid assets than total liabilities.
This excess liquidity suggests that Immunocore Holdings is taking a careful approach to debt. Due to its strong net asset position, it is not likely to face issues with its lenders. Simply put, the fact that Immunocore Holdings 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 it is future earnings, more than anything, that will determine Immunocore Holdings'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.
In the last year Immunocore Holdings wasn't profitable at an EBIT level, but managed to grow its revenue by 28%, to US$281m. With any luck the company will be able to grow its way to profitability.
So How Risky Is Immunocore Holdings?
Although Immunocore Holdings had an earnings before interest and tax (EBIT) loss over the last twelve months, it generated positive free cash flow of US$9.5m. So although it is loss-making, it doesn't seem to have too much near-term balance sheet risk, keeping in mind the net cash. Keeping in mind its 28% revenue growth over the last year, we think there's a decent chance the company is on track. There's no doubt fast top line growth can cure all manner of ills, for a stock. 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. For example - Immunocore Holdings has 2 warning signs we think you should be aware of.
If, after all that, you're more interested in a fast growing company with a rock-solid balance sheet, then check out our list of net cash growth stocks without delay.
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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.