Here's Why Tarsus Pharmaceuticals (NASDAQ:TARS) Can Manage Its Debt Despite Losing Money

Howard Marks put it nicely when he said that, rather than worrying about share price volatility, 'The possibility of permanent loss is the risk I worry about... and every practical investor I know worries about.' 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 Tarsus Pharmaceuticals, Inc. (NASDAQ:TARS) does use debt in its business. But is this debt a concern to shareholders?

What Risk Does Debt Bring?

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. If things get really bad, the lenders can take control of the business. 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. 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 thing to do when considering how much debt a business uses is to look at its cash and debt together.

View our latest analysis for Tarsus Pharmaceuticals

How Much Debt Does Tarsus Pharmaceuticals Carry?

The image below, which you can click on for greater detail, shows that at June 2024 Tarsus Pharmaceuticals had debt of US$71.6m, up from US$24.6m in one year. However, its balance sheet shows it holds US$323.6m in cash, so it actually has US$252.0m net cash.

How Healthy Is Tarsus Pharmaceuticals' Balance Sheet?

Zooming in on the latest balance sheet data, we can see that Tarsus Pharmaceuticals had liabilities of US$51.6m due within 12 months and liabilities of US$73.0m due beyond that. Offsetting these obligations, it had cash of US$323.6m as well as receivables valued at US$30.8m due within 12 months. So it actually has US$229.8m more liquid assets than total liabilities.

This short term liquidity is a sign that Tarsus Pharmaceuticals could probably pay off its debt with ease, as its balance sheet is far from stretched. Simply put, the fact that Tarsus 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 Tarsus Pharmaceuticals'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.

In the last year Tarsus Pharmaceuticals wasn't profitable at an EBIT level, but managed to grow its revenue by 567%, to US$83m. When it comes to revenue growth, that's like nailing the game winning 3-pointer!

So How Risky Is Tarsus Pharmaceuticals?

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 Tarsus Pharmaceuticals had an earnings before interest and tax (EBIT) loss, over the last year. Indeed, in that time it burnt through US$129m of cash and made a loss of US$150m. But at least it has US$252.0m on the balance sheet to spend on growth, near-term. The good news for shareholders is that Tarsus Pharmaceuticals has dazzling revenue growth, so there's a very good chance it can boost its free cash flow in the years to come. High growth pre-profit companies may well be risky, but they can also offer great rewards. When analysing debt levels, the balance sheet is the obvious place to start. However, not all investment risk resides within the balance sheet - far from it. To that end, you should be aware of the 2 warning signs we've spotted with Tarsus Pharmaceuticals .

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.