Is Blueprint Medicines (NASDAQ:BPMC) 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 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 Blueprint Medicines Corporation (NASDAQ:BPMC) does use debt in its business. But should shareholders be worried about its use of debt?

What Risk Does Debt Bring?

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. If things get really bad, the lenders can take control of the business. 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 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 Blueprint Medicines

How Much Debt Does Blueprint Medicines Carry?

As you can see below, at the end of December 2023, Blueprint Medicines had US$680.4m of debt, up from US$569.4m a year ago. Click the image for more detail. But on the other hand it also has US$710.6m in cash, leading to a US$30.2m net cash position.

How Healthy Is Blueprint Medicines' Balance Sheet?

We can see from the most recent balance sheet that Blueprint Medicines had liabilities of US$214.9m falling due within a year, and liabilities of US$703.7m due beyond that. Offsetting this, it had US$710.6m in cash and US$43.2m in receivables that were due within 12 months. So it has liabilities totalling US$164.8m more than its cash and near-term receivables, combined.

Of course, Blueprint Medicines has a market capitalization of US$5.56b, so these liabilities are probably manageable. Having said that, it's clear that we should continue to monitor its balance sheet, lest it change for the worse. While it does have liabilities worth noting, Blueprint Medicines also has more cash than debt, so we're pretty confident 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 Blueprint Medicines'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.

Over 12 months, Blueprint Medicines reported revenue of US$249m, which is a gain of 22%, although it did not report any earnings before interest and tax. With any luck the company will be able to grow its way to profitability.

So How Risky Is Blueprint Medicines?

Statistically speaking companies that lose money are riskier than those that make money. And we do note that Blueprint Medicines had an earnings before interest and tax (EBIT) loss, over the last year. And over the same period it saw negative free cash outflow of US$453m and booked a US$507m accounting loss. But at least it has US$30.2m on the balance sheet to spend on growth, near-term. Blueprint Medicines's revenue growth shone bright over the last year, so it may well be in a position to turn a profit in due course. Pre-profit companies are often risky, but they can also offer great 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. We've identified 2 warning signs with Blueprint Medicines , and understanding them should be part of your investment process.

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.

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.