Bicycle Therapeutics (NASDAQ:BCYC) Is Using Debt Safely

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.' 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 Bicycle Therapeutics plc (NASDAQ:BCYC) makes use of debt. But the more important question is: how much risk is that debt creating?

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. If things get really bad, the lenders can take control of the business. 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. Having said that, the most common situation is where a company manages its debt reasonably well - and to its own advantage. The first thing to do when considering how much debt a business uses is to look at its cash and debt together.

Check out our latest analysis for Bicycle Therapeutics

What Is Bicycle Therapeutics's Debt?

As you can see below, Bicycle Therapeutics had US$30.6m of debt, at September 2023, which is about the same as the year before. You can click the chart for greater detail. However, it does have US$572.1m in cash offsetting this, leading to net cash of US$541.5m.

How Healthy Is Bicycle Therapeutics' Balance Sheet?

We can see from the most recent balance sheet that Bicycle Therapeutics had liabilities of US$69.7m falling due within a year, and liabilities of US$152.9m due beyond that. Offsetting this, it had US$572.1m in cash and US$17.3m in receivables that were due within 12 months. So it actually has US$366.7m more liquid assets than total liabilities.

This surplus strongly suggests that Bicycle Therapeutics has a rock-solid balance sheet (and the debt is of no concern whatsoever). On this view, lenders should feel as safe as the beloved of a black-belt karate master. Succinctly put, Bicycle Therapeutics boasts net cash, so it's fair to say it does not have a heavy debt load! When analysing debt levels, the balance sheet is the obvious place to start. But ultimately the future profitability of the business will decide if Bicycle Therapeutics 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.

In the last year Bicycle Therapeutics wasn't profitable at an EBIT level, but managed to grow its revenue by 65%, to US$25m. Shareholders probably have their fingers crossed that it can grow its way to profits.

So How Risky Is Bicycle Therapeutics?

We have no doubt that loss making companies are, in general, riskier than profitable ones. And in the last year Bicycle Therapeutics had an earnings before interest and tax (EBIT) loss, truth be told. Indeed, in that time it burnt through US$48m of cash and made a loss of US$162m. While this does make the company a bit risky, it's important to remember it has net cash of US$541.5m. That kitty means the company can keep spending for growth for at least two years, at current rates. With very solid revenue growth in the last year, Bicycle Therapeutics may be on a path to profitability. By investing before those profits, shareholders take on more risk in the hope of bigger rewards. When analysing debt levels, the balance sheet is the obvious place to start. But ultimately, every company can contain risks that exist outside of the balance sheet. Be aware that Bicycle Therapeutics is showing 2 warning signs in our investment analysis , you should know about...

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.

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