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 seems the smart money knows that debt - which is usually involved in bankruptcies - is a very important factor, when you assess how risky a company is. Importantly, ALX Oncology Holdings Inc. (NASDAQ:ALXO) does carry debt. But the more important question is: how much risk is that debt creating?

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. In the worst case scenario, a company can go bankrupt if it cannot pay its creditors. However, a more frequent (but still costly) occurrence is where a company must issue shares at bargain-basement prices, permanently diluting shareholders, just to shore up its balance sheet. Of course, debt can be an important tool in businesses, particularly capital heavy businesses. When we think about a company's use of debt, we first look at cash and debt together.

What Is ALX Oncology Holdings's Debt?

The chart below, which you can click on for greater detail, shows that ALX Oncology Holdings had US$9.64m in debt in December 2023; about the same as the year before. However, it does have US$182.7m in cash offsetting this, leading to net cash of US$173.1m.

How Healthy Is ALX Oncology Holdings' Balance Sheet?

According to the last reported balance sheet, ALX Oncology Holdings had liabilities of US$36.0m due within 12 months, and liabilities of US$16.8m due beyond 12 months. Offsetting this, it had US$182.7m in cash and US$600.0k in receivables that were due within 12 months. So it actually has US$130.5m more liquid assets than total liabilities.

It's good to see that ALX Oncology Holdings has plenty of liquidity on its balance sheet, suggesting conservative management of liabilities. Due to its strong net asset position, it is not likely to face issues with its lenders. Simply put, the fact that ALX Oncology Holdings has more cash than debt is arguably a good indication that 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 ALX Oncology Holdings can strengthen its balance sheet over time. So if you're focused on the future you can check out this free report showing analyst profit forecasts.

Since ALX Oncology Holdings doesn't have significant operating revenue, shareholders may be hoping it comes up with a great new product, before it runs out of money.

So How Risky Is ALX Oncology Holdings?

By their very nature companies that are losing money are more risky than those with a long history of profitability. And in the last year ALX Oncology Holdings had an earnings before interest and tax (EBIT) loss, truth be told. Indeed, in that time it burnt through US$132m of cash and made a loss of US$161m. But at least it has US$173.1m on the balance sheet to spend on growth, near-term. Even though its balance sheet seems sufficiently liquid, debt always makes us a little nervous if a company doesn't produce free cash flow regularly. 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. To that end, you should learn about the 4 warning signs we've spotted with ALX Oncology Holdings (including 1 which is potentially serious) .

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.

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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.