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.' 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. We can see that Xencor, Inc. (NASDAQ:XNCR) does use debt in its business. But is this debt a concern to shareholders?

Why Does Debt Bring Risk?

Debt assists a business until the business has trouble paying it off, either with new capital or with free cash flow. Ultimately, if the company can't fulfill its legal obligations to repay debt, shareholders could walk away with nothing. However, a more common (but still painful) scenario is that it has to raise new equity capital at a low price, thus permanently diluting shareholders. Of course, debt can be an important tool in businesses, particularly capital heavy businesses. When we examine debt levels, we first consider both cash and debt levels, together.

What Is Xencor's Debt?

The image below, which you can click on for greater detail, shows that at December 2023 Xencor had debt of US$21.0m, up from none in one year. However, it does have US$593.7m in cash offsetting this, leading to net cash of US$572.8m.

How Healthy Is Xencor's Balance Sheet?

Zooming in on the latest balance sheet data, we can see that Xencor had liabilities of US$84.7m due within 12 months and liabilities of US$198.9m due beyond that. Offsetting these obligations, it had cash of US$593.7m as well as receivables valued at US$11.3m due within 12 months. So it actually has US$321.5m more liquid assets than total liabilities.

This excess liquidity suggests that Xencor is taking a careful approach to debt. Given it has easily adequate short term liquidity, we don't think it will have any issues with its lenders. Succinctly put, Xencor 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 ultimately the future profitability of the business will decide if Xencor 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 Xencor wasn't profitable at an EBIT level, but managed to grow its revenue by 2.3%, to US$168m. We usually like to see faster growth from unprofitable companies, but each to their own.

So How Risky Is Xencor?

While Xencor lost money on an earnings before interest and tax (EBIT) level, it actually generated positive free cash flow US$64m. So although it is loss-making, it doesn't seem to have too much near-term balance sheet risk, keeping in mind the net cash. We'll feel more comfortable with the stock once EBIT is positive, given the lacklustre revenue growth. 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. For instance, we've identified 1 warning sign for Xencor that you should be aware of.

At the end of the day, it's often better to focus on companies that are free from net debt. You can access our special list of such companies (all with a track record of profit growth). It's free.

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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.