Is Apellis Pharmaceuticals (NASDAQ:APLS) Using Debt In A Risky Way?

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.' 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. We can see that Apellis Pharmaceuticals, Inc. (NASDAQ:APLS) does use debt in its business. But is this debt a concern to shareholders?

What Risk Does Debt Bring?

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. However, a more common (but still painful) scenario is that it has to raise new equity capital at a low price, thus permanently diluting shareholders. 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.

See our latest analysis for Apellis Pharmaceuticals

How Much Debt Does Apellis Pharmaceuticals Carry?

The image below, which you can click on for greater detail, shows that Apellis Pharmaceuticals had debt of US$92.7m at the end of December 2022, a reduction from US$189.0m over a year. However, its balance sheet shows it holds US$558.3m in cash, so it actually has US$465.6m net cash.

How Healthy Is Apellis Pharmaceuticals' Balance Sheet?

According to the last reported balance sheet, Apellis Pharmaceuticals had liabilities of US$167.6m due within 12 months, and liabilities of US$422.7m due beyond 12 months. Offsetting these obligations, it had cash of US$558.3m as well as receivables valued at US$37.9m due within 12 months. So its total liabilities are just about perfectly matched by its shorter-term, liquid assets.

This state of affairs indicates that Apellis Pharmaceuticals' balance sheet looks quite solid, as its total liabilities are just about equal to its liquid assets. So it's very unlikely that the US$9.46b company is short on cash, but still worth keeping an eye on the 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 it is future earnings, more than anything, that will determine Apellis Pharmaceuticals'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, Apellis Pharmaceuticals reported revenue of US$75m, which is a gain of 13%, although it did not report any earnings before interest and tax. That rate of growth is a bit slow for our taste, but it takes all types to make a world.

So How Risky Is Apellis Pharmaceuticals?

Statistically speaking companies that lose money are riskier than those that make money. And the fact is that over the last twelve months Apellis Pharmaceuticals lost money at the earnings before interest and tax (EBIT) line. And over the same period it saw negative free cash outflow of US$515m and booked a US$652m accounting loss. However, it has net cash of US$465.6m, so it has a bit of time before it will need more capital. Even though its balance sheet seems sufficiently liquid, debt always makes us a little nervous if a company doesn't produce free cash flow regularly. 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. Be aware that Apellis Pharmaceuticals is showing 1 warning sign in our investment analysis , you should know about...

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.