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Is HOOKIPA Pharma (NASDAQ:HOOK) Using Debt In A Risky Way?

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.' 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 HOOKIPA Pharma Inc. (NASDAQ:HOOK) does use debt in its business. But the real question is whether this debt is making the company risky.

Why Does Debt Bring Risk?

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. In the worst case scenario, a company can go bankrupt if it cannot pay its creditors. 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. 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. The first thing to do when considering how much debt a business uses is to look at its cash and debt together.

View our latest analysis for HOOKIPA Pharma

What Is HOOKIPA Pharma's Debt?

As you can see below, HOOKIPA Pharma had US$3.82m of debt at June 2020, down from US$4.75m a year prior. However, it does have US$92.9m in cash offsetting this, leading to net cash of US$89.0m.

debt-equity-history-analysis
debt-equity-history-analysis

How Strong Is HOOKIPA Pharma's Balance Sheet?

According to the last reported balance sheet, HOOKIPA Pharma had liabilities of US$18.6m due within 12 months, and liabilities of US$10.8m due beyond 12 months. On the other hand, it had cash of US$92.9m and US$15.7m worth of receivables due within a year. So it can boast US$79.2m more liquid assets than total liabilities.

This surplus liquidity suggests that HOOKIPA Pharma's balance sheet could take a hit just as well as Homer Simpson's head can take a punch. On this view, lenders should feel as safe as the beloved of a black-belt karate master. Simply put, the fact that HOOKIPA Pharma 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 HOOKIPA Pharma 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.

Over 12 months, HOOKIPA Pharma reported revenue of US$16m, which is a gain of 21%, although it did not report any earnings before interest and tax. With any luck the company will be able to grow its way to profitability.

So How Risky Is HOOKIPA Pharma?

Statistically speaking companies that lose money are riskier than those that make money. And the fact is that over the last twelve months HOOKIPA Pharma lost money at the earnings before interest and tax (EBIT) line. Indeed, in that time it burnt through US$39m of cash and made a loss of US$40m. While this does make the company a bit risky, it's important to remember it has net cash of US$89.0m. 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, HOOKIPA Pharma may be on a path to profitability. By investing before those profits, shareholders take on more risk in the hope of bigger rewards. There's no doubt that we learn most about debt from the balance sheet. But ultimately, every company can contain risks that exist outside of the balance sheet. For instance, we've identified 2 warning signs for HOOKIPA Pharma (1 makes us a bit uncomfortable) 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.

This article by Simply Wall St is general in nature. 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.

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