Does Bicycle Therapeutics (NASDAQ:BCYC) Have A Healthy Balance Sheet?

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.' 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. We can see that Bicycle Therapeutics plc (NASDAQ:BCYC) does use debt in its business. But is this debt a concern to shareholders?

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. Part and parcel of capitalism is the process of 'creative destruction' where failed businesses are mercilessly liquidated by their bankers. 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. 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

How Much Debt Does Bicycle Therapeutics Carry?

As you can see below, Bicycle Therapeutics had US$30.7m of debt, at December 2023, which is about the same as the year before. You can click the chart for greater detail. But on the other hand it also has US$526.4m in cash, leading to a US$495.7m net cash position.

A Look At Bicycle Therapeutics' Liabilities

The latest balance sheet data shows that Bicycle Therapeutics had liabilities of US$69.5m due within a year, and liabilities of US$154.9m falling due after that. Offsetting these obligations, it had cash of US$526.4m as well as receivables valued at US$24.0m due within 12 months. So it actually has US$326.1m more liquid assets than total liabilities.

This excess liquidity is a great indication that Bicycle Therapeutics' balance sheet is almost as strong as Fort Knox. 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! 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 Bicycle Therapeutics's ability to maintain a healthy balance sheet going forward. 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 87%, to US$27m. With any luck the company will be able to grow its way to profitability.

So How Risky Is Bicycle Therapeutics?

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 Bicycle Therapeutics lost money at the earnings before interest and tax (EBIT) line. And over the same period it saw negative free cash outflow of US$64m and booked a US$181m accounting loss. While this does make the company a bit risky, it's important to remember it has net cash of US$495.7m. That means it could keep spending at its current rate for more than two years. With very solid revenue growth in the last year, Bicycle Therapeutics may be on a path to profitability. Pre-profit companies are often risky, but they can also offer great rewards. The balance sheet is clearly the area to focus on when you are analysing debt. But ultimately, every company can contain risks that exist outside of the balance sheet. Case in point: We've spotted 2 warning signs for Bicycle Therapeutics 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.