Recursion Pharmaceuticals (NASDAQ:RXRX) Is Using Debt Safely

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 Recursion Pharmaceuticals, Inc. (NASDAQ:RXRX) does have debt on its balance sheet. But the real question is whether this debt is making the company risky.

What Risk Does Debt Bring?

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. 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, debt can be an important tool in businesses, particularly capital heavy businesses. When we think about a company's use of debt, we first look at cash and debt together.

Check out our latest analysis for Recursion Pharmaceuticals

What Is Recursion Pharmaceuticals's Net Debt?

You can click the graphic below for the historical numbers, but it shows that as of September 2023 Recursion Pharmaceuticals had US$1.82m of debt, an increase on US$656.0k, over one year. However, it does have US$387.3m in cash offsetting this, leading to net cash of US$385.5m.

How Healthy Is Recursion Pharmaceuticals' Balance Sheet?

According to the last reported balance sheet, Recursion Pharmaceuticals had liabilities of US$94.1m due within 12 months, and liabilities of US$98.7m due beyond 12 months. Offsetting these obligations, it had cash of US$387.3m as well as receivables valued at US$3.16m due within 12 months. So it can boast US$197.6m more liquid assets than total liabilities.

This surplus suggests that Recursion Pharmaceuticals has a conservative balance sheet, and could probably eliminate its debt without much difficulty. Simply put, the fact that Recursion 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 it is future earnings, more than anything, that will determine Recursion 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.

In the last year Recursion Pharmaceuticals wasn't profitable at an EBIT level, but managed to grow its revenue by 65%, to US$47m. With any luck the company will be able to grow its way to profitability.

So How Risky Is Recursion 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 Recursion 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$277m and booked a US$293m accounting loss. But at least it has US$385.5m on the balance sheet to spend on growth, near-term. With very solid revenue growth in the last year, Recursion Pharmaceuticals may be on a path to profitability. Pre-profit companies are often risky, but they can also offer great rewards. 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. To that end, you should learn about the 4 warning signs we've spotted with Recursion Pharmaceuticals (including 1 which doesn't sit too well with us) .

If, after all that, you're more interested in a fast growing company with a rock-solid balance sheet, then check out our list of net cash growth stocks without delay.

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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.