Does Scholar Rock Holding (NASDAQ:SRRK) Have A Healthy Balance Sheet?
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.' It's only natural to consider a company's balance sheet when you examine how risky it is, since debt is often involved when a business collapses. As with many other companies Scholar Rock Holding Corporation (NASDAQ:SRRK) makes use of debt. But the more important question is: how much risk is that debt creating?
What Risk Does Debt Bring?
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. Ultimately, if the company can't fulfill its legal obligations to repay debt, shareholders could walk away with nothing. While that is not too common, we often do see indebted companies permanently diluting shareholders because lenders force them to raise capital at a distressed price. Having said that, the most common situation is where a company manages its debt reasonably well - and to its own advantage. When we examine debt levels, we first consider both cash and debt levels, together.
See our latest analysis for Scholar Rock Holding
What Is Scholar Rock Holding's Debt?
You can click the graphic below for the historical numbers, but it shows that as of December 2020 Scholar Rock Holding had US$24.7m of debt, an increase on none, over one year. But on the other hand it also has US$341.0m in cash, leading to a US$316.4m net cash position.
How Strong Is Scholar Rock Holding's Balance Sheet?
Zooming in on the latest balance sheet data, we can see that Scholar Rock Holding had liabilities of US$42.6m due within 12 months and liabilities of US$85.0m due beyond that. On the other hand, it had cash of US$341.0m and US$25.0m worth of receivables due within a year. So it can boast US$238.5m more liquid assets than total liabilities.
It's good to see that Scholar Rock Holding has plenty of liquidity on its balance sheet, suggesting conservative management of liabilities. Due to its strong net asset position, it is not likely to face issues with its lenders. Simply put, the fact that Scholar Rock Holding has more cash than debt is arguably a good indication that it can manage its debt safely. There's no doubt that we learn most about debt from the balance sheet. But it is future earnings, more than anything, that will determine Scholar Rock Holding'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 Scholar Rock Holding had a loss before interest and tax, and actually shrunk its revenue by 25%, to US$15m. That makes us nervous, to say the least.
So How Risky Is Scholar Rock Holding?
We have no doubt that loss making companies are, in general, riskier than profitable ones. And in the last year Scholar Rock Holding 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$64m and booked a US$86m accounting loss. But the saving grace is the US$316.4m on the balance sheet. That kitty means the company can keep spending for growth for at least two years, at current rates. Overall, its balance sheet doesn't seem overly risky, at the moment, but we're always cautious until we see the positive free cash flow. When analysing debt levels, the balance sheet is the obvious place to start. However, not all investment risk resides within the balance sheet - far from it. For example - Scholar Rock Holding has 3 warning signs we think you should be aware of.
If you're interested in investing in businesses that can grow profits without the burden of debt, then check out this free list of growing businesses that have net cash on the balance sheet.
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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