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Is Bicycle Therapeutics (NASDAQ:BCYC) Using Debt In A Risky Way?

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Simply Wall St
·4 min read
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Warren Buffett famously said, 'Volatility is far from synonymous with risk.' 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, Bicycle Therapeutics plc (NASDAQ:BCYC) does carry debt. But should shareholders be worried about its use of debt?

When Is Debt A Problem?

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. 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. The first thing to do when considering how much debt a business uses is to look at its cash and debt together.

Check out our latest analysis for Bicycle Therapeutics

What Is Bicycle Therapeutics's Debt?

You can click the graphic below for the historical numbers, but it shows that as of September 2020 Bicycle Therapeutics had US$14.4m of debt, an increase on none, over one year. However, its balance sheet shows it holds US$149.8m in cash, so it actually has US$135.4m net cash.

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

A Look At Bicycle Therapeutics' Liabilities

Zooming in on the latest balance sheet data, we can see that Bicycle Therapeutics had liabilities of US$17.0m due within 12 months and liabilities of US$43.5m due beyond that. On the other hand, it had cash of US$149.8m and US$8.80m worth of receivables due within a year. So it can boast US$98.1m more liquid assets than total liabilities.

This surplus suggests that Bicycle Therapeutics is using debt in a way that is appears to be both safe and conservative. Due to its strong net asset position, it is not likely to face issues with its lenders. Simply put, the fact that Bicycle Therapeutics has more cash than debt is arguably a good indication that it can manage its debt safely. When analysing debt levels, the balance sheet is the obvious place to start. But it is future earnings, more than anything, that will determine Bicycle Therapeutics's ability to maintain a healthy balance sheet going forward. So if you're focused on the future you can check out this free report showing analyst profit forecasts.

In the last year Bicycle Therapeutics wasn't profitable at an EBIT level, but managed to grow its revenue by 23%, to US$12m. With any luck the company will be able to grow its way to profitability.

So How Risky Is Bicycle Therapeutics?

Statistically speaking companies that lose money are riskier than those that make money. And in the last year Bicycle Therapeutics 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$7.2m and booked a US$38m accounting loss. But the saving grace is the US$135.4m on the balance sheet. That means it could keep spending at its current rate for more than two years. Bicycle Therapeutics's revenue growth shone bright over the last year, so it may well be in a position to turn a profit in due course. 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. However, not all investment risk resides within the balance sheet - far from it. Like risks, for instance. Every company has them, and we've spotted 3 warning signs for Bicycle Therapeutics (of which 1 is a bit unpleasant!) you should know about.

If, after all that, you're more interested in a fast growing company with a rock-solid balance sheet, then check out our list of net cash growth stocks without delay.

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.

Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team (at) simplywallst.com.