Centessa Pharmaceuticals (NASDAQ:CNTA) Has Debt But No Earnings; Should You Worry?

Warren Buffett famously said, '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 Centessa Pharmaceuticals plc (NASDAQ:CNTA) does use debt in its business. But the real question is whether this debt is making the company risky.

What Risk Does Debt Bring?

Debt assists a business until the business has trouble paying it off, either with new capital or with free cash flow. Ultimately, if the company can't fulfill its legal obligations to repay debt, shareholders could walk away with nothing. 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, plenty of companies use debt to fund growth, without any negative consequences. When we think about a company's use of debt, we first look at cash and debt together.

See our latest analysis for Centessa Pharmaceuticals

What Is Centessa Pharmaceuticals's Debt?

The image below, which you can click on for greater detail, shows that at June 2024 Centessa Pharmaceuticals had debt of US$76.5m, up from US$73.3m in one year. However, it does have US$294.8m in cash offsetting this, leading to net cash of US$218.3m.

How Healthy Is Centessa Pharmaceuticals' Balance Sheet?

Zooming in on the latest balance sheet data, we can see that Centessa Pharmaceuticals had liabilities of US$26.8m due within 12 months and liabilities of US$85.1m due beyond that. Offsetting this, it had US$294.8m in cash and US$41.9m in receivables that were due within 12 months. So it actually has US$224.9m more liquid assets than total liabilities.

This surplus suggests that Centessa Pharmaceuticals is using debt in a way that is appears to be both safe and conservative. Given it has easily adequate short term liquidity, we don't think it will have any issues with its lenders. Simply put, the fact that Centessa Pharmaceuticals 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 Centessa Pharmaceuticals'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.

While it hasn't made a profit, at least Centessa Pharmaceuticals booked its first revenue as a publicly listed company, in the last twelve months.

So How Risky Is Centessa Pharmaceuticals?

Statistically speaking companies that lose money are riskier than those that make money. And the fact is that over the last twelve months Centessa Pharmaceuticals lost money at the earnings before interest and tax (EBIT) line. Indeed, in that time it burnt through US$146m of cash and made a loss of US$157m. But at least it has US$218.3m on the balance sheet to spend on growth, near-term. 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. 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 Centessa Pharmaceuticals , 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.

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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.