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Legendary fund manager Li Lu (who Charlie Munger backed) once said, 'The biggest investment risk is not the volatility of prices, but whether you will suffer a permanent loss of capital.' So it seems the smart money knows that debt - which is usually involved in bankruptcies - is a very important factor, when you assess how risky a company is. Importantly, Apellis Pharmaceuticals, Inc. (NASDAQ:APLS) does carry debt. But the real question is whether this debt is making the company risky.
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. In the worst case scenario, a company can go bankrupt if it cannot pay its creditors. 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. 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. When we examine debt levels, we first consider both cash and debt levels, together.
How Much Debt Does Apellis Pharmaceuticals Carry?
You can click the graphic below for the historical numbers, but it shows that as of March 2021 Apellis Pharmaceuticals had US$386.2m of debt, an increase on US$144.6m, over one year. But on the other hand it also has US$723.7m in cash, leading to a US$337.5m net cash position.
A Look At Apellis Pharmaceuticals' Liabilities
According to the last reported balance sheet, Apellis Pharmaceuticals had liabilities of US$83.7m due within 12 months, and liabilities of US$674.8m due beyond 12 months. Offsetting these obligations, it had cash of US$723.7m as well as receivables valued at US$20.0m due within 12 months. So these liquid assets roughly match the total liabilities.
Having regard to Apellis Pharmaceuticals' size, it seems that its liquid assets are well balanced with its total liabilities. So it's very unlikely that the US$4.08b company is short on cash, but still worth keeping an eye on the balance sheet. Despite its noteworthy liabilities, Apellis Pharmaceuticals 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 Apellis Pharmaceuticals'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.
In the last year Apellis Pharmaceuticals managed to produce its first revenue as a listed company, but given the lack of profit, shareholders will no doubt be hoping to see some strong increases.
So How Risky Is Apellis Pharmaceuticals?
Statistically speaking companies that lose money are riskier than those that make money. And in the last year Apellis Pharmaceuticals had an earnings before interest and tax (EBIT) loss, truth be told. And over the same period it saw negative free cash outflow of US$211m and booked a US$360m accounting loss. But at least it has US$337.5m on the balance sheet to spend on growth, near-term. Summing up, we're a little skeptical of this one, as it seems fairly risky in the absence of free cashflow. There's no doubt that we learn most about debt from the balance sheet. However, not all investment risk resides within the balance sheet - far from it. Be aware that Apellis Pharmaceuticals is showing 2 warning signs in our investment analysis , you should know about...
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.
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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