Castle Biosciences (NASDAQ:CSTL) May Not Be Profitable But It Seems To Be Managing Its Debt Just Fine, Anyway

Howard Marks put it nicely when he said that, rather than worrying about share price volatility, 'The possibility of permanent loss is the risk I worry about... and every practical investor I know worries about.' 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. Importantly, Castle Biosciences, Inc. (NASDAQ:CSTL) does carry debt. But the real question is whether this debt is making the company risky.

What Risk Does Debt Bring?

Generally speaking, debt only becomes a real problem when a company can't easily pay it off, either by raising capital or with its own cash flow. Part and parcel of capitalism is the process of 'creative destruction' where failed businesses are mercilessly liquidated by their bankers. However, a more frequent (but still costly) occurrence is where a company must issue shares at bargain-basement prices, permanently diluting shareholders, just to shore up its balance sheet. Of course, the upside of debt is that it often represents cheap capital, especially when it replaces dilution in a company with the ability to reinvest 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 Castle Biosciences

What Is Castle Biosciences's Net Debt?

You can click the graphic below for the historical numbers, but it shows that as of September 2024 Castle Biosciences had US$10.0m of debt, an increase on none, over one year. However, its balance sheet shows it holds US$279.8m in cash, so it actually has US$269.8m net cash.

A Look At Castle Biosciences' Liabilities

We can see from the most recent balance sheet that Castle Biosciences had liabilities of US$44.3m falling due within a year, and liabilities of US$29.2m due beyond that. On the other hand, it had cash of US$279.8m and US$50.3m worth of receivables due within a year. So it can boast US$256.5m more liquid assets than total liabilities.

This luscious liquidity implies that Castle Biosciences' balance sheet is sturdy like a giant sequoia tree. With this in mind one could posit that its balance sheet means the company is able to handle some adversity. Succinctly put, Castle Biosciences boasts net cash, so it's fair to say it does not have a heavy debt load! When analysing debt levels, the balance sheet is the obvious place to start. But it is future earnings, more than anything, that will determine Castle Biosciences'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 Castle Biosciences wasn't profitable at an EBIT level, but managed to grow its revenue by 62%, to US$312m. With any luck the company will be able to grow its way to profitability.

So How Risky Is Castle Biosciences?

Although Castle Biosciences had an earnings before interest and tax (EBIT) loss over the last twelve months, it made a statutory profit of US$6.1m. So taking that on face value, and considering the cash, we don't think its very risky in the near term. Keeping in mind its 62% revenue growth over the last year, we think there's a decent chance the company is on track. There's no doubt fast top line growth can cure all manner of ills, for a stock. When analysing debt levels, the balance sheet is the obvious place to start. But ultimately, every company can contain risks that exist outside of the balance sheet. For instance, we've identified 2 warning signs for Castle Biosciences (1 is a bit concerning) you should be aware of.

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.

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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.