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.' It's only natural to consider a company's balance sheet when you examine how risky it is, since debt is often involved when a business collapses. We can see that Immunocore Holdings plc (NASDAQ:IMCR) does use debt in its business. But the real question is whether this debt is making the company risky.

When Is Debt Dangerous?

Debt and other liabilities become risky for a business when it cannot easily fulfill those obligations, either with free cash flow or by raising capital at an attractive price. 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, 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.

How Much Debt Does Immunocore Holdings Carry?

As you can see below, at the end of March 2024, Immunocore Holdings had US$437.5m of debt, up from US$47.8m a year ago. Click the image for more detail. But it also has US$832.8m in cash to offset that, meaning it has US$395.3m net cash.

How Healthy Is Immunocore Holdings' Balance Sheet?

We can see from the most recent balance sheet that Immunocore Holdings had liabilities of US$155.3m falling due within a year, and liabilities of US$479.2m due beyond that. Offsetting these obligations, it had cash of US$832.8m as well as receivables valued at US$57.8m due within 12 months. So it can boast US$256.1m more liquid assets than total liabilities.

This surplus suggests that Immunocore Holdings has a conservative balance sheet, and could probably eliminate its debt without much difficulty. Simply put, the fact that Immunocore Holdings has more cash than debt is arguably a good indication that it can manage its debt safely. There's no doubt that we learn most about debt from the balance sheet. 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 32%, to US$265m. Shareholders probably have their fingers crossed that it can grow its way to profits.

So How Risky Is Immunocore Holdings?

Statistically speaking companies that lose money are riskier than those that make money. And the fact is that over the last twelve months Immunocore Holdings lost money at the earnings before interest and tax (EBIT) line. Indeed, in that time it burnt through US$15m of cash and made a loss of US$60m. While this does make the company a bit risky, it's important to remember it has net cash of US$395.3m. 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, Immunocore Holdings may be on a path to profitability. Pre-profit companies are often risky, but they can also offer great rewards. The balance sheet is clearly the area to focus on when you are analysing debt. But ultimately, every company can contain risks that exist outside of the balance sheet. These risks can be hard to spot. Every company has them, and we've spotted 2 warning signs for Immunocore Holdings you should know about.

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.

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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.

Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team@simplywallst.com