Health Check: How Prudently Does Apellis Pharmaceuticals (NASDAQ:APLS) Use Debt?

David Iben put it well when he said, 'Volatility is not a risk we care about. What we care about is avoiding the permanent loss of capital.' 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. As with many other companies Apellis Pharmaceuticals, Inc. (NASDAQ:APLS) makes use of debt. But the more important question is: how much risk is that debt creating?

Why Does Debt Bring Risk?

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. In the worst case scenario, a company can go bankrupt if it cannot pay its creditors. 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 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 Apellis Pharmaceuticals

What Is Apellis Pharmaceuticals's Debt?

The chart below, which you can click on for greater detail, shows that Apellis Pharmaceuticals had US$93.1m in debt in March 2024; about the same as the year before. But on the other hand it also has US$333.5m in cash, leading to a US$240.4m net cash position.

How Strong Is Apellis Pharmaceuticals' Balance Sheet?

Zooming in on the latest balance sheet data, we can see that Apellis Pharmaceuticals had liabilities of US$215.3m due within 12 months and liabilities of US$350.0m due beyond that. Offsetting these obligations, it had cash of US$333.5m as well as receivables valued at US$272.3m due within 12 months. So it can boast US$40.6m more liquid assets than total liabilities.

Having regard to Apellis Pharmaceuticals' size, it seems that its liquid assets are well balanced with its total liabilities. So while it's hard to imagine that the US$4.54b company is struggling for cash, we still think it's worth monitoring its balance sheet. Simply put, the fact that Apellis Pharmaceuticals has more cash than debt is arguably a good indication that it can manage its debt safely. The balance sheet is clearly the area to focus on when you are analysing debt. But ultimately the future profitability of the business will decide if Apellis Pharmaceuticals can strengthen its balance sheet over time. So if you want to see what the professionals think, you might find this free report on analyst profit forecasts to be interesting.

Over 12 months, Apellis Pharmaceuticals reported revenue of US$524m, which is a gain of 395%, although it did not report any earnings before interest and tax. That's virtually the hole-in-one of revenue growth!

So How Risky Is Apellis Pharmaceuticals?

By their very nature companies that are losing money are more risky than those with a long history of profitability. And we do note that Apellis Pharmaceuticals had an earnings before interest and tax (EBIT) loss, over the last year. Indeed, in that time it burnt through US$551m of cash and made a loss of US$417m. With only US$240.4m on the balance sheet, it would appear that its going to need to raise capital again soon. The good news for shareholders is that Apellis Pharmaceuticals has dazzling revenue growth, so there's a very good chance it can boost its free cash flow in the years to come. While unprofitable companies can be risky, they can also grow hard and fast in those pre-profit years. The balance sheet is clearly the area to focus on when you are analysing debt. However, not all investment risk resides within the balance sheet - far from it. Case in point: We've spotted 2 warning signs for Apellis Pharmaceuticals you should be aware of.

At the end of the day, it's often better to focus on companies that are free from net debt. You can access our special list of such companies (all with a track record of profit growth). It's free.

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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.

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