Is Scholar Rock Holding (NASDAQ:SRRK) Using Too Much Debt?

Warren Buffett famously said, 'Volatility is far from synonymous with risk.' When we think about how risky a company is, we always like to look at its use of debt, since debt overload can lead to ruin. Importantly, Scholar Rock Holding Corporation (NASDAQ:SRRK) does carry debt. But should shareholders be worried about its use of debt?

Why Does Debt Bring Risk?

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. Part and parcel of capitalism is the process of 'creative destruction' where failed businesses are mercilessly liquidated by their bankers. While that is not too common, we often do see indebted companies permanently diluting shareholders because lenders force them to raise capital at a distressed price. Having said that, the most common situation is where a company manages its debt reasonably well - and to its own advantage. When we examine debt levels, we first consider both cash and debt levels, together.

Check out our latest analysis for Scholar Rock Holding

What Is Scholar Rock Holding's Debt?

You can click the graphic below for the historical numbers, but it shows that as of December 2020 Scholar Rock Holding had US$24.7m of debt, an increase on none, over one year. But it also has US$341.0m in cash to offset that, meaning it has US$316.4m net cash.

How Strong Is Scholar Rock Holding's Balance Sheet?

The latest balance sheet data shows that Scholar Rock Holding had liabilities of US$42.6m due within a year, and liabilities of US$85.0m falling due after that. Offsetting this, it had US$341.0m in cash and US$25.0m in receivables that were due within 12 months. So it can boast US$238.5m 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. 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 Scholar Rock Holding 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.

In the last year Scholar Rock Holding had a loss before interest and tax, and actually shrunk its revenue by 25%, to US$15m. That makes us nervous, to say the least.

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. Indeed, in that time it burnt through US$64m of cash and made a loss of US$86m. While this does make the company a bit risky, it's important to remember it has net cash of US$316.4m. That kitty means the company can keep spending for growth for at least two years, at current rates. 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. To that end, you should be aware of the 3 warning signs we've spotted with Scholar Rock Holding .

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.

If you’re looking to trade Scholar Rock Holding, open an account with the lowest-cost* platform trusted by professionals, Interactive Brokers. Their clients from over 200 countries and territories trade stocks, options, futures, forex, bonds and funds worldwide from a single integrated account. Promoted

This article by Simply Wall St is general in nature. 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.
^*Interactive Brokers Rated Lowest Cost Broker by StockBrokers.com Annual Online Review 2020

Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team (at) simplywallst.com.