Health Check: How Prudently Does Centessa Pharmaceuticals (NASDAQ:CNTA) 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.' 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. As with many other companies Centessa Pharmaceuticals plc (NASDAQ:CNTA) makes use of debt. But is this debt a concern to shareholders?

When Is Debt Dangerous?

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. Ultimately, if the company can't fulfill its legal obligations to repay debt, shareholders could walk away with nothing. However, a more common (but still painful) scenario is that it has to raise new equity capital at a low price, thus permanently diluting shareholders. 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.

See our latest analysis for Centessa Pharmaceuticals

How Much Debt Does Centessa Pharmaceuticals Carry?

As you can see below, at the end of September 2023, Centessa Pharmaceuticals had US$74.0m of debt, up from US$68.2m a year ago. Click the image for more detail. However, its balance sheet shows it holds US$281.3m in cash, so it actually has US$207.3m net cash.

A Look At Centessa Pharmaceuticals' Liabilities

Zooming in on the latest balance sheet data, we can see that Centessa Pharmaceuticals had liabilities of US$35.0m due within 12 months and liabilities of US$83.0m due beyond that. Offsetting these obligations, it had cash of US$281.3m as well as receivables valued at US$30.4m due within 12 months. So it can boast US$193.8m more liquid assets than total liabilities.

This excess liquidity suggests that Centessa Pharmaceuticals is taking a careful approach to debt. 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. 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 Centessa Pharmaceuticals 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.

Since Centessa Pharmaceuticals doesn't have significant operating revenue, shareholders may be hoping it comes up with a great new product, before it runs out of money.

So How Risky Is Centessa Pharmaceuticals?

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 Centessa Pharmaceuticals lost money at the earnings before interest and tax (EBIT) line. And over the same period it saw negative free cash outflow of US$182m and booked a US$157m accounting loss. However, it has net cash of US$207.3m, 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. Be aware that Centessa Pharmaceuticals is showing 5 warning signs in our investment analysis , and 2 of those 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.