Cerevel Therapeutics Holdings (NASDAQ:CERE) Has Debt But No Earnings; Should You Worry?

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.' 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. Importantly, Cerevel Therapeutics Holdings, Inc. (NASDAQ:CERE) does carry debt. But the real question is whether this debt is making the company risky.

Why Does Debt Bring Risk?

Debt and other liabilities become risky for a business when it cannot easily fulfill those obligations, either with free cash flow or by raising capital at an attractive price. In the worst case scenario, a company can go bankrupt if it cannot pay its creditors. While that is not too common, we often do see indebted companies permanently diluting shareholders because lenders force them to raise capital at a distressed price. Of course, the upside of debt is that it often represents cheap capital, especially when it replaces dilution in a company with the ability to reinvest at high rates of return. The first step when considering a company's debt levels is to consider its cash and debt together.

View our latest analysis for Cerevel Therapeutics Holdings

How Much Debt Does Cerevel Therapeutics Holdings Carry?

As you can see below, at the end of December 2023, Cerevel Therapeutics Holdings had US$449.6m of debt, up from US$392.8m a year ago. Click the image for more detail. But it also has US$991.0m in cash to offset that, meaning it has US$541.4m net cash.

How Strong Is Cerevel Therapeutics Holdings' Balance Sheet?

Zooming in on the latest balance sheet data, we can see that Cerevel Therapeutics Holdings had liabilities of US$92.2m due within 12 months and liabilities of US$477.4m due beyond that. Offsetting these obligations, it had cash of US$991.0m as well as receivables valued at US$5.29m due within 12 months. So it actually has US$426.7m more liquid assets than total liabilities.

This surplus suggests that Cerevel Therapeutics Holdings has a conservative balance sheet, and could probably eliminate its debt without much difficulty. Succinctly put, Cerevel Therapeutics Holdings boasts net cash, so it's fair to say it does not have a heavy debt load! There's no doubt that we learn most about debt from the balance sheet. But ultimately the future profitability of the business will decide if Cerevel Therapeutics Holdings can strengthen its balance sheet over time. So if you're focused on the future you can check out this free report showing analyst profit forecasts.

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

So How Risky Is Cerevel Therapeutics Holdings?

We have no doubt that loss making companies are, in general, riskier than profitable ones. And in the last year Cerevel Therapeutics Holdings had an earnings before interest and tax (EBIT) loss, truth be told. Indeed, in that time it burnt through US$346m of cash and made a loss of US$433m. While this does make the company a bit risky, it's important to remember it has net cash of US$541.4m. 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. Be aware that Cerevel Therapeutics Holdings is showing 3 warning signs in our investment analysis , and 1 of those is concerning...

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.

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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.