Health Check: How Prudently Does Celcuity (NASDAQ:CELC) Use Debt?

Legendary fund manager Li Lu (who Charlie Munger backed) once said, 'The biggest investment risk is not the volatility of prices, but whether you will suffer a permanent loss of capital.' When we think about how risky a company is, we always like to look at its use of debt, since debt overload can lead to ruin. We can see that Celcuity Inc. (NASDAQ:CELC) does use debt in its business. But the more important question is: how much risk is that debt creating?

Why Does Debt Bring Risk?

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. In the worst case scenario, a company can go bankrupt if it cannot pay its creditors. However, a more frequent (but still costly) occurrence is where a company must issue shares at bargain-basement prices, permanently diluting shareholders, just to shore up its balance sheet. Having said that, the most common situation is where a company manages its debt reasonably well - and to its own advantage. When we examine debt levels, we first consider both cash and debt levels, together.

See our latest analysis for Celcuity

What Is Celcuity's Net Debt?

The image below, which you can click on for greater detail, shows that at June 2021 Celcuity had debt of US$14.2m, up from none in one year. However, its balance sheet shows it holds US$41.7m in cash, so it actually has US$27.4m net cash.

How Healthy Is Celcuity's Balance Sheet?

The latest balance sheet data shows that Celcuity had liabilities of US$1.54m due within a year, and liabilities of US$14.2m falling due after that. On the other hand, it had cash of US$41.7m and US$190.0k worth of receivables due within a year. So it can boast US$26.1m more liquid assets than total liabilities.

This short term liquidity is a sign that Celcuity could probably pay off its debt with ease, as its balance sheet is far from stretched. Simply put, the fact that Celcuity 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 ultimately the future profitability of the business will decide if Celcuity 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.

Given its lack of meaningful operating revenue, Celcuity shareholders no doubt hope it can fund itself until it has a profitable product.

So How Risky Is Celcuity?

Statistically speaking companies that lose money are riskier than those that make money. And in the last year Celcuity had an earnings before interest and tax (EBIT) loss, truth be told. Indeed, in that time it burnt through US$14m of cash and made a loss of US$22m. However, it has net cash of US$27.4m, so it has a bit of time before it will need more capital. Overall, its balance sheet doesn't seem overly risky, at the moment, but we're always cautious until we see the positive free cash flow. The balance sheet is clearly the area to focus on when you are analysing debt. However, not all investment risk resides within the balance sheet - far from it. To that end, you should learn about the 4 warning signs we've spotted with Celcuity (including 1 which is a bit unpleasant) .

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.
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