Is Bicycle Therapeutics (NASDAQ:BCYC) Weighed On By Its Debt Load?

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 might be obvious that you need to consider debt, when you think about how risky any given stock is, because too much debt can sink a company. 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 assists a business until the business has trouble paying it off, either with new capital or with free cash flow. In the worst case scenario, a company can go bankrupt if it cannot pay its creditors. 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, plenty of companies use debt to fund growth, without any negative consequences. The first step when considering a company's debt levels is to consider its cash and debt together.

View our latest analysis for Bicycle Therapeutics

What Is Bicycle Therapeutics's Net Debt?

As you can see below, Bicycle Therapeutics had US$30.0m of debt, at March 2022, which is about the same as the year before. You can click the chart for greater detail. However, its balance sheet shows it holds US$407.4m in cash, so it actually has US$377.4m net cash.

How Strong Is Bicycle Therapeutics' Balance Sheet?

According to the last reported balance sheet, Bicycle Therapeutics had liabilities of US$35.4m due within 12 months, and liabilities of US$93.9m due beyond 12 months. Offsetting these obligations, it had cash of US$407.4m as well as receivables valued at US$13.3m due within 12 months. So it can boast US$291.4m more liquid assets than total liabilities.

This luscious liquidity implies that Bicycle Therapeutics' balance sheet is sturdy like a giant sequoia tree. With this in mind one could posit that its balance sheet means the company is able to handle some adversity. Simply put, the fact that Bicycle Therapeutics has more cash than debt is arguably a good indication that it can manage its debt safely. When analysing debt levels, the balance sheet is the obvious place to start. 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 24%, to US$14m. With any luck the company will be able to grow its way to profitability.

So How Risky Is Bicycle Therapeutics?

By their very nature companies that are losing money are more risky than those with a long history of profitability. And the fact is that over the last twelve months Bicycle Therapeutics lost money at the earnings before interest and tax (EBIT) line. Indeed, in that time it burnt through US$34m of cash and made a loss of US$78m. While this does make the company a bit risky, it's important to remember it has net cash of US$377.4m. 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. 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. For example, we've discovered 4 warning signs for Bicycle Therapeutics (1 is potentially serious!) that you should be aware of before investing here.

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.

Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team (at) simplywallst.com.

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.