Health Check: How Prudently Does Scholar Rock Holding (NASDAQ:SRRK) 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 seems the smart money knows that debt - which is usually involved in bankruptcies - is a very important factor, when you assess how risky a company is. We note that Scholar Rock Holding Corporation (NASDAQ:SRRK) 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?

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. If things get really bad, the lenders can take control of the business. 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, debt can be an important tool in businesses, particularly capital heavy businesses. The first thing to do when considering how much debt a business uses is to look at its cash and debt together.

See our latest analysis for Scholar Rock Holding

How Much Debt Does Scholar Rock Holding Carry?

The chart below, which you can click on for greater detail, shows that Scholar Rock Holding had US$50.0m in debt in December 2023; about the same as the year before. But on the other hand it also has US$279.9m in cash, leading to a US$229.9m net cash position.

A Look At Scholar Rock Holding's Liabilities

The latest balance sheet data shows that Scholar Rock Holding had liabilities of US$32.7m due within a year, and liabilities of US$53.1m falling due after that. Offsetting these obligations, it had cash of US$279.9m as well as receivables valued at US$1.08m due within 12 months. So it actually has US$195.2m more liquid assets than total liabilities.

This excess liquidity suggests that Scholar Rock Holding is taking a careful approach to debt. Because it has plenty of assets, it is unlikely to have trouble with its lenders. Simply put, the fact that Scholar Rock Holding 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 Scholar Rock Holding'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.

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

So How Risky Is Scholar Rock Holding?

By their very nature companies that are losing money are more risky than those with a long history of profitability. And we do note that Scholar Rock Holding 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$145m and booked a US$166m accounting loss. However, it has net cash of US$229.9m, 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. For example Scholar Rock Holding has 5 warning signs (and 1 which doesn't sit too well with us) we think you should know about.

When all is said and done, sometimes its easier to focus on companies that don't even need debt. Readers can access a list of growth stocks with zero net debt 100% free, right now.

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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.