Health Check: How Prudently Does Scholar Rock Holding (NASDAQ:SRRK) Use Debt?

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.' 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 can see that Scholar Rock Holding Corporation (NASDAQ:SRRK) does use debt in its business. But the more important question is: how much risk is that debt creating?

When Is Debt Dangerous?

Debt and other liabilities become risky for a business when it cannot easily fulfill those obligations, either with free cash flow or by raising capital at an attractive price. In the worst case scenario, a company can go bankrupt if it cannot pay its creditors. 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.

View 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$50.1m in debt in June 2024; about the same as the year before. But on the other hand it also has US$190.5m in cash, leading to a US$140.4m 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$33.0m due within a year, and liabilities of US$60.3m falling due after that. Offsetting these obligations, it had cash of US$190.5m as well as receivables valued at US$1.29m due within 12 months. So it actually has US$98.5m more liquid assets than total liabilities.

This surplus suggests that Scholar Rock Holding has a conservative balance sheet, and could probably eliminate its debt without much difficulty. 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. 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 Scholar Rock Holding's ability to maintain a healthy balance sheet going forward. So if you're focused on the future you can check out this free report showing analyst profit forecasts.

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 the fact is that over the last twelve months Scholar Rock Holding lost money at the earnings before interest and tax (EBIT) line. And over the same period it saw negative free cash outflow of US$169m and booked a US$204m accounting loss. But at least it has US$140.4m 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. For instance, we've identified 5 warning signs for Scholar Rock Holding (2 can't be ignored) you should be aware of.

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.