Is Applied Therapeutics (NASDAQ:APLT) Using Debt In A Risky Way?

The external fund manager backed by Berkshire Hathaway's Charlie Munger, Li Lu, makes no bones about it when he says 'The biggest investment risk is not the volatility of prices, but whether you will suffer a 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. Importantly, Applied Therapeutics, Inc. (NASDAQ:APLT) does carry debt. But should shareholders be worried about its use of debt?

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. 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, 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 step when considering a company's debt levels is to consider its cash and debt together.

See our latest analysis for Applied Therapeutics

What Is Applied Therapeutics's Net Debt?

The chart below, which you can click on for greater detail, shows that Applied Therapeutics had US$3.16m in debt in June 2021; about the same as the year before. But on the other hand it also has US$125.6m in cash, leading to a US$122.5m net cash position.

A Look At Applied Therapeutics' Liabilities

We can see from the most recent balance sheet that Applied Therapeutics had liabilities of US$23.4m falling due within a year, and liabilities of US$1.11m due beyond that. Offsetting these obligations, it had cash of US$125.6m as well as receivables valued at US$335.0k due within 12 months. So it can boast US$101.4m more liquid assets than total liabilities.

This surplus suggests that Applied Therapeutics is using debt in a way that is appears to be both safe and conservative. Due to its strong net asset position, it is not likely to face issues with its lenders. Simply put, the fact that Applied Therapeutics 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 Applied Therapeutics 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.

Given its lack of meaningful operating revenue, Applied Therapeutics shareholders no doubt hope it can fund itself until it has a profitable product.

So How Risky Is Applied Therapeutics?

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 Applied Therapeutics had an earnings before interest and tax (EBIT) loss, over the last year. Indeed, in that time it burnt through US$92m of cash and made a loss of US$104m. While this does make the company a bit risky, it's important to remember it has net cash of US$122.5m. That kitty means the company can keep spending for growth for at least two years, at current rates. 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. There's no doubt that we learn most about debt from the balance sheet. However, not all investment risk resides within the balance sheet - far from it. Be aware that Applied Therapeutics is showing 4 warning signs in our investment analysis , and 1 of those makes us a bit uncomfortable...

If, after all that, you're more interested in a fast growing company with a rock-solid balance sheet, then check out our list of net cash growth stocks without delay.

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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