Is Castle Biosciences (NASDAQ:CSTL) A Risky Investment?

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.' 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. We can see that Castle Biosciences, Inc. (NASDAQ:CSTL) does use debt in its business. But the more important question is: how much risk is that debt creating?

When Is Debt Dangerous?

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. If things get really bad, the lenders can take control of the business. 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, plenty of companies use debt to fund growth, without any negative consequences. The first step when considering a company's debt levels is to consider its cash and debt together.

View our latest analysis for Castle Biosciences

How Much Debt Does Castle Biosciences Carry?

You can click the graphic below for the historical numbers, but it shows that as of March 2024 Castle Biosciences had US$10.0m of debt, an increase on none, over one year. However, it does have US$239.2m in cash offsetting this, leading to net cash of US$229.2m.

How Strong Is Castle Biosciences' Balance Sheet?

The latest balance sheet data shows that Castle Biosciences had liabilities of US$32.0m due within a year, and liabilities of US$24.1m falling due after that. Offsetting these obligations, it had cash of US$239.2m as well as receivables valued at US$42.7m due within 12 months. So it actually has US$225.9m more liquid assets than total liabilities.

This surplus liquidity suggests that Castle Biosciences' balance sheet could take a hit just as well as Homer Simpson's head can take a punch. With this in mind one could posit that its balance sheet means the company is able to handle some adversity. Simply put, the fact that Castle Biosciences 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 Castle Biosciences'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.

Over 12 months, Castle Biosciences reported revenue of US$251m, which is a gain of 65%, although it did not report any earnings before interest and tax. Shareholders probably have their fingers crossed that it can grow its way to profits.

So How Risky Is Castle Biosciences?

By their very nature companies that are losing money are more risky than those with a long history of profitability. And the fact is that over the last twelve months Castle Biosciences lost money at the earnings before interest and tax (EBIT) line. Indeed, in that time it burnt through US$6.5m of cash and made a loss of US$31m. While this does make the company a bit risky, it's important to remember it has net cash of US$229.2m. That kitty means the company can keep spending for growth for at least two years, at current rates. Castle Biosciences's revenue growth shone bright over the last year, so it may well be in a position to turn a profit in due course. Pre-profit companies are often risky, but they can also offer great rewards. The balance sheet is clearly the area to focus on when you are analysing debt. But ultimately, every company can contain risks that exist outside of the balance sheet. For example - Castle Biosciences has 2 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.

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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.

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