Is COMPASS Pathways (NASDAQ:CMPS) Using Debt Sensibly?

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.' 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 COMPASS Pathways plc (NASDAQ:CMPS) does use debt in its business. But should shareholders be worried about its use of debt?

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When Is Debt A Problem?

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 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. 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. When we think about a company's use of debt, we first look at cash and debt together.

What Is COMPASS Pathways's Net Debt?

As you can see below, at the end of June 2025, COMPASS Pathways had US$30.9m of debt, up from US$29.4m a year ago. Click the image for more detail. However, it does have US$221.9m in cash offsetting this, leading to net cash of US$190.9m.

A Look At COMPASS Pathways' Liabilities

We can see from the most recent balance sheet that COMPASS Pathways had liabilities of US$31.3m falling due within a year, and liabilities of US$99.7m due beyond that. Offsetting this, it had US$221.9m in cash and US$37.3m in receivables that were due within 12 months. So it can boast US$128.2m more liquid assets than total liabilities.

It's good to see that COMPASS Pathways has plenty of liquidity on its balance sheet, suggesting conservative management of liabilities. Because it has plenty of assets, it is unlikely to have trouble with its lenders. Simply put, the fact that COMPASS Pathways 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 COMPASS Pathways'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.

Check out our latest analysis for COMPASS Pathways

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

So How Risky Is COMPASS Pathways?

We have no doubt that loss making companies are, in general, riskier than profitable ones. And the fact is that over the last twelve months COMPASS Pathways lost money at the earnings before interest and tax (EBIT) line. And over the same period it saw negative free cash outflow of US$148m and booked a US$138m accounting loss. However, it has net cash of US$190.9m, 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. But ultimately, every company can contain risks that exist outside of the balance sheet. Case in point: We've spotted 4 warning signs for COMPASS Pathways you should be aware of, and 3 of them are a bit concerning.

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.

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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.