Is Centessa Pharmaceuticals (NASDAQ:CNTA) Using Debt Sensibly?

David Iben put it well when he said, 'Volatility is not a risk we care about. What we care about is avoiding the permanent loss of capital.' It's only natural to consider a company's balance sheet when you examine how risky it is, since debt is often involved when a business collapses. We note that Centessa Pharmaceuticals plc (NASDAQ:CNTA) does have debt on its balance sheet. But should shareholders be worried about its use of debt?

When Is Debt Dangerous?

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. Part and parcel of capitalism is the process of 'creative destruction' where failed businesses are mercilessly liquidated by their bankers. 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. By replacing dilution, though, debt can be an extremely good tool for businesses that need capital to invest in growth at high rates of return. When we examine debt levels, we first consider both cash and debt levels, together.

View our latest analysis for Centessa Pharmaceuticals

What Is Centessa Pharmaceuticals's Debt?

As you can see below, Centessa Pharmaceuticals had US$75.7m of debt, at September 2024, which is about the same as the year before. You can click the chart for greater detail. However, it does have US$518.4m in cash offsetting this, leading to net cash of US$442.7m.

A Look At Centessa Pharmaceuticals' Liabilities

The latest balance sheet data shows that Centessa Pharmaceuticals had liabilities of US$26.8m due within a year, and liabilities of US$110.6m falling due after that. Offsetting this, it had US$518.4m in cash and US$47.0m in receivables that were due within 12 months. So it can boast US$428.1m more liquid assets than total liabilities.

This excess liquidity suggests that Centessa Pharmaceuticals is taking a careful approach to debt. Due to its strong net asset position, it is not likely to face 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?

We have no doubt that loss making companies are, in general, riskier than profitable ones. And we do note that Centessa Pharmaceuticals had an earnings before interest and tax (EBIT) loss, over the last year. And over the same period it saw negative free cash outflow of US$146m and booked a US$161m accounting loss. But the saving grace is the US$442.7m on the balance sheet. That means it could keep spending at its current rate for more than two years. 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. There's no doubt that we learn most about debt from the balance sheet. However, not all investment risk resides within the balance sheet - far from it. We've identified 3 warning signs with Centessa Pharmaceuticals , and understanding them should be part of your investment process.

Of course, if you're the type of investor who prefers buying stocks without the burden of debt, then don't hesitate to discover our exclusive list of net cash growth stocks, today.

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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.