Is Cerus (NASDAQ:CERS) Using Debt In A Risky Way?

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.' When we think about how risky a company is, we always like to look at its use of debt, since debt overload can lead to ruin. As with many other companies Cerus Corporation (NASDAQ:CERS) makes use of debt. But the real question is whether this debt is making the company risky.

When Is Debt A Problem?

Debt and other liabilities become risky for a business when it cannot easily fulfill those obligations, either with free cash flow or by raising capital at an attractive price. 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. 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.

View our latest analysis for Cerus

How Much Debt Does Cerus Carry?

As you can see below, at the end of March 2022, Cerus had US$69.8m of debt, up from US$64.6m a year ago. Click the image for more detail. However, its balance sheet shows it holds US$108.6m in cash, so it actually has US$38.8m net cash.

How Strong Is Cerus' Balance Sheet?

According to the last reported balance sheet, Cerus had liabilities of US$66.7m due within 12 months, and liabilities of US$74.8m due beyond 12 months. On the other hand, it had cash of US$108.6m and US$25.6m worth of receivables due within a year. So its liabilities total US$7.29m more than the combination of its cash and short-term receivables.

This state of affairs indicates that Cerus' balance sheet looks quite solid, as its total liabilities are just about equal to its liquid assets. So while it's hard to imagine that the US$1.02b company is struggling for cash, we still think it's worth monitoring its balance sheet. While it does have liabilities worth noting, Cerus also has more cash than debt, so we're pretty confident it can manage its debt safely. When analysing debt levels, the balance sheet is the obvious place to start. But ultimately the future profitability of the business will decide if Cerus can strengthen its balance sheet over time. So if you're focused on the future you can check out this free report showing analyst profit forecasts.

Over 12 months, Cerus reported revenue of US$145m, which is a gain of 50%, although it did not report any earnings before interest and tax. With any luck the company will be able to grow its way to profitability.

So How Risky Is Cerus?

We have no doubt that loss making companies are, in general, riskier than profitable ones. And the fact is that over the last twelve months Cerus lost money at the earnings before interest and tax (EBIT) line. And over the same period it saw negative free cash outflow of US$39m and booked a US$49m accounting loss. However, it has net cash of US$38.8m, so it has a bit of time before it will need more capital. Cerus'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. But ultimately, every company can contain risks that exist outside of the balance sheet. For example - Cerus has 2 warning signs we think you should be aware of.

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.

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

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.