The external fund manager backed by Berkshire Hathaway's Charlie Munger, Li Lu, makes no bones about it when he says 'The biggest investment risk is not the volatility of prices, but whether you will suffer a permanent loss of capital. So it might be obvious that you need to consider debt, when you think about how risky any given stock is, because too much debt can sink a company. Importantly, OSE Immunotherapeutics SA (EPA:OSE) does carry debt. But should shareholders be worried about its use of debt?

When Is Debt Dangerous?

Debt assists a business until the business has trouble paying it off, either with new capital or with free 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 usual (but still expensive) situation is where a company must dilute shareholders at a cheap share price simply to get debt under control. Of course, the upside of debt is that it often represents cheap capital, especially when it replaces dilution in a company with the ability to reinvest at high rates of return. When we examine debt levels, we first consider both cash and debt levels, together.

View our latest analysis for OSE Immunotherapeutics

What Is OSE Immunotherapeutics's Net Debt?

As you can see below, at the end of June 2019, OSE Immunotherapeutics had €5.15m of debt, up from €4.75m a year ago. Click the image for more detail. But on the other hand it also has €26.5m in cash, leading to a €21.4m net cash position.

A Look At OSE Immunotherapeutics's Liabilities

According to the last reported balance sheet, OSE Immunotherapeutics had liabilities of €20.7m due within 12 months, and liabilities of €11.5m due beyond 12 months. On the other hand, it had cash of €26.5m and €9.12m worth of receivables due within a year. So it can boast €3.47m more liquid assets than total liabilities.

This surplus suggests that OSE Immunotherapeutics has a conservative balance sheet, and could probably eliminate its debt without much difficulty. Succinctly put, OSE Immunotherapeutics boasts net cash, so it's fair to say it does not have a heavy debt load! There's no doubt that we learn most about debt from the balance sheet. But ultimately the future profitability of the business will decide if OSE Immunotherapeutics can strengthen its balance sheet over time. So if you want to see what the professionals think, you might find this free report on analyst profit forecasts to be interesting.

In the last year OSE Immunotherapeutics had negative earnings before interest and tax, and actually shrunk its revenue by 19%, to €20m. We would much prefer see growth.

So How Risky Is OSE Immunotherapeutics?

While OSE Immunotherapeutics lost money on an earnings before interest and tax (EBIT) level, it actually generated positive free cash flow €7.7m. So taking that on face value, and considering the net cash situation, we don't think that the stock is too risky in the near term. We'll feel more comfortable with the stock once EBIT is positive, given the lacklustre revenue growth. For riskier companies like OSE Immunotherapeutics I always like to keep an eye on the long term profit and revenue trends. Fortunately, you can click to see our interactive graph of its profit, revenue, and operating cashflow.

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.

We aim to bring you long-term focused research analysis driven by fundamental data. Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative material.

If you spot an error that warrants correction, please contact the editor at editorial-team@simplywallst.com. 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. Simply Wall St has no position in the stocks mentioned. Thank you for reading.