David Iben put it well when he said, 'Volatility is not a risk we care about. What we care about is avoiding the 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. We can see that uniQure N.V. (NASDAQ:QURE) does use debt in its business. But is this debt a concern to shareholders?
Why Does Debt Bring Risk?
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. Part and parcel of capitalism is the process of 'creative destruction' where failed businesses are mercilessly liquidated by their bankers. 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. Having said that, the most common situation is where a company manages its debt reasonably well - and to its own advantage. When we think about a company's use of debt, we first look at cash and debt together.
What Is uniQure's Net Debt?
The image below, which you can click on for greater detail, shows that at June 2019 uniQure had debt of US$35.8m, up from US$20.9m in one year. But on the other hand it also has US$184.1m in cash, leading to a US$148.3m net cash position.
A Look At uniQure's Liabilities
We can see from the most recent balance sheet that uniQure had liabilities of US$23.4m falling due within a year, and liabilities of US$97.7m due beyond that. Offsetting these obligations, it had cash of US$184.1m as well as receivables valued at US$355.0k due within 12 months. So it can boast US$63.4m more liquid assets than total liabilities.
This surplus suggests that uniQure has a conservative balance sheet, and could probably eliminate its debt without much difficulty. Succinctly put, uniQure 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 uniQure's ability to maintain a healthy balance sheet going forward. So if you want to see what the professionals think, you might find this free report on analyst profit forecasts to be interesting.
Over 12 months, uniQure saw its revenue drop to US$8.4m, which is a fall of 26%. To be frank that doesn't bode well.
So How Risky Is uniQure?
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 uniQure lost money at the earnings before interest and tax (EBIT) line. And over the same period it saw negative free cash outflow of US$93m and booked a US$105m accounting loss. However, it has net cash of US$184m, so it has a bit of time before it will need more capital. 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. For riskier companies like uniQure I always like to keep an eye on whether insiders are buying or selling. So click here if you want to find out for yourself.
When all is said and done, sometimes its easier to focus on companies that don't even need debt. Readers can access a list of growth stocks with zero net debt 100% free, right now.
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