Is Apellis Pharmaceuticals (NASDAQ:APLS) Using Debt Sensibly?

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.' 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. Importantly, Apellis Pharmaceuticals, Inc. (NASDAQ:APLS) does carry debt. But the real question is whether this debt is making the company risky.

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 usual (but still expensive) situation is where a company must dilute shareholders at a cheap share price simply to get debt under control. 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. When we think about a company's use of debt, we first look at cash and debt together.

Check out our latest analysis for Apellis Pharmaceuticals

What Is Apellis Pharmaceuticals's Net Debt?

As you can see below, Apellis Pharmaceuticals had US$92.7m of debt at September 2022, down from US$189.6m a year prior. But it also has US$708.6m in cash to offset that, meaning it has US$615.9m net cash.

How Healthy Is Apellis Pharmaceuticals' Balance Sheet?

We can see from the most recent balance sheet that Apellis Pharmaceuticals had liabilities of US$115.4m falling due within a year, and liabilities of US$450.0m due beyond that. Offsetting this, it had US$708.6m in cash and US$28.1m in receivables that were due within 12 months. So it actually has US$171.2m more liquid assets than total liabilities.

This short term liquidity is a sign that Apellis Pharmaceuticals could probably pay off its debt with ease, as its balance sheet is far from stretched. 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're focused on the future you can check out this free report showing analyst profit forecasts.

Over 12 months, Apellis Pharmaceuticals made a loss at the EBIT level, and saw its revenue drop to US$113m, which is a fall of 56%. To be frank that doesn't bode well.

So How Risky Is Apellis Pharmaceuticals?

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 Apellis Pharmaceuticals lost money at the earnings before interest and tax (EBIT) line. Indeed, in that time it burnt through US$486m of cash and made a loss of US$634m. However, it has net cash of US$615.9m, so it has a bit of time before it will need more capital. Overall, its balance sheet doesn't seem overly risky, at the moment, but we're always cautious until we see the positive free cash flow. 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. We've identified 2 warning signs with Apellis Pharmaceuticals , and understanding them should be part of your investment process.

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.