Health Check: How Carefully Does Affimed (NASDAQ: AFMD) Use Debt?
Berkshire Hathaway’s Charlie Munger-backed outside fund manager Li Lu is quick to say, “The biggest risk in investing isn’t price volatility, but whether you’re going to suffer a permanent loss of capital “. So it may be obvious that you need to take debt into account when thinking about the risk of a given stock, because too much debt can sink a business. Like many other companies Affimed NV (NASDAQ:AFMD) uses debt. But the real question is whether this debt makes the business risky.
Why is debt risky?
Generally speaking, debt only becomes a real problem when a company cannot easily repay it, either by raising capital or with its own cash flow. Ultimately, if the company cannot meet its legal debt repayment obligations, shareholders could walk away with nothing. However, a more common (but still costly) event is when a company has to issue stock at bargain prices, permanently diluting shareholders, just to shore up its balance sheet. Of course, the advantage of debt is that it often represents cheap capital, especially when it replaces dilution in a business with the ability to reinvest at high rates of return. The first thing to do when considering how much debt a business has is to look at its cash and debt together.
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What is Affimed Debt?
You can click on the graph below for historical numbers, but it shows that in June 2022, Affimed had €17.9 million in debt, an increase of €10.1 million, year-on-year. However, his balance sheet shows that he holds €237.2m in cash, so he actually has €219.4m in net cash.
A look at Affimed’s responsibilities
Zooming in on the latest balance sheet data, we can see that Affimed had liabilities of €52.0m due within 12 months and liabilities of €16.1m due beyond. On the other hand, it had €237.2 million in cash and €5.52 million in receivables at less than one year. It can therefore claim 174.7 million euros more cash than total Passives.
This surplus strongly suggests that Affimed has a rock-solid balance sheet (and debt is nothing to worry about). From this perspective, lenders should feel as secure as the beloved of a black belt karate master. In summary, Affimed has a net cash position, so it’s fair to say that they don’t have a lot of debt! When analyzing debt levels, the balance sheet is the obvious starting point. But it is ultimately the company’s future profitability that will decide whether Affimed can strengthen its balance sheet over time. So if you want to see what the professionals think, you might find this free analyst earnings forecast report interesting.
Over the past year, Affimed has recorded a loss before interest and taxes and has actually reduced its revenue by 16%, to 36 million euros. We would much rather see growth.
So how assertive is the risk?
We have no doubt that loss-making companies are, in general, more risky than profitable companies. And we note that Affimed has recorded a loss in earnings before interest and taxes (EBIT) over the past year. And over the same period, it recorded a negative free cash outflow of 111 million euros and recorded an accounting loss of 76 million euros. Although this makes the company a little risky, it is important to remember that it has a net cash position of 219.4 million euros. This pot means that the company can continue to spend on growth for at least two years, at current rates. Even if its balance sheet seems sufficiently liquid, debt always makes us a little nervous if a company does not produce free cash flow regularly. There is no doubt that we learn the most about debt from the balance sheet. However, not all investment risks reside on the balance sheet, far from it. We have identified 2 warning signs with Affimed and understanding them should be part of your investment process.
In the end, sometimes it’s easier to focus on companies that don’t even need to take on debt. Readers can access a list of growth stocks with no net debt 100% freeat present.
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This Simply Wall St article is general in nature. We provide commentary based on historical data and analyst forecasts only using unbiased methodology and our articles are not intended to be financial advice. It is not a recommendation to buy or sell stocks and does not take into account your objectives or financial situation. Our goal is to bring you targeted long-term analysis based on fundamental data. Note that our analysis may not take into account the latest announcements from price-sensitive companies or qualitative materials. Simply Wall St has no position in the stocks mentioned.
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