Some say volatility, rather than debt, is the best way to think about risk as an investor, but Warren Buffett famously said that 'Volatility is far from synonymous with risk.' 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, Bicycle Therapeutics plc (NASDAQ:BCYC) does carry debt. But the real question is whether this debt is making the company risky.
When Is Debt A Problem?
Generally speaking, debt only becomes a real problem when a company can't easily pay it off, either by raising capital or with its own cash flow. Part and parcel of capitalism is the process of 'creative destruction' where failed businesses are mercilessly liquidated by their bankers. 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. When we think about a company's use of debt, we first look at cash and debt together.
What Is Bicycle Therapeutics's Net Debt?
As you can see below, at the end of December 2021, Bicycle Therapeutics had US$29.9m of debt, up from US$14.5m a year ago. Click the image for more detail. However, it does have US$438.7m in cash offsetting this, leading to net cash of US$408.8m.
How Healthy Is Bicycle Therapeutics' Balance Sheet?
According to the last reported balance sheet, Bicycle Therapeutics had liabilities of US$36.2m due within 12 months, and liabilities of US$97.3m due beyond 12 months. Offsetting these obligations, it had cash of US$438.7m as well as receivables valued at US$11.9m due within 12 months. So it can boast US$317.1m more liquid assets than total liabilities.
This surplus suggests that Bicycle Therapeutics is using debt in a way that is appears to be both safe and conservative. Because it has plenty of assets, it is unlikely to have trouble with its lenders. Simply put, the fact that Bicycle 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 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're focused on the future you can check out this free report showing analyst profit forecasts.
In the last year Bicycle Therapeutics wasn't profitable at an EBIT level, but managed to grow its revenue by 13%, to US$12m. We usually like to see faster growth from unprofitable companies, but each to their own.
So How Risky Is Bicycle Therapeutics?
Statistically speaking companies that lose money are riskier than those that make money. 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$17m and booked a US$67m accounting loss. But the saving grace is the US$408.8m on the balance sheet. 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. 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. For instance, we've identified 4 warning signs for Bicycle Therapeutics (1 shouldn't be ignored) you should be aware of.
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.
What are the risks and opportunities for Bicycle Therapeutics?
Revenue is forecast to grow 61.61% per year
Currently unprofitable and not forecast to become profitable over the next 3 years
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