Is Tarsus Pharmaceuticals (NASDAQ:TARS) Using Too Much Debt?

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.' 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. As with many other companies Tarsus Pharmaceuticals, Inc. (NASDAQ:TARS) makes use of debt. But the real question is whether this debt is making the company risky.

When Is Debt A Problem?

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. Ultimately, if the company can't fulfill its legal obligations to repay debt, shareholders could walk away with nothing. 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. By replacing dilution, though, debt can be an extremely good tool for businesses that need capital to invest in growth 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.

Check out our latest analysis for Tarsus Pharmaceuticals

How Much Debt Does Tarsus Pharmaceuticals Carry?

You can click the graphic below for the historical numbers, but it shows that as of September 2024 Tarsus Pharmaceuticals had US$71.7m of debt, an increase on US$29.7m, over one year. But it also has US$317.0m in cash to offset that, meaning it has US$245.2m net cash.

A Look At Tarsus Pharmaceuticals' Liabilities

According to the last reported balance sheet, Tarsus Pharmaceuticals had liabilities of US$65.9m due within 12 months, and liabilities of US$72.9m due beyond 12 months. Offsetting this, it had US$317.0m in cash and US$30.3m in receivables that were due within 12 months. So it actually has US$208.4m more liquid assets than total liabilities.

This surplus suggests that Tarsus Pharmaceuticals has a conservative balance sheet, and could probably eliminate its debt without much difficulty. 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.

Over 12 months, Tarsus Pharmaceuticals reported revenue of US$130m, which is a gain of 802%, although it did not report any earnings before interest and tax. That's virtually the hole-in-one of revenue growth!

So How Risky Is Tarsus 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 Tarsus Pharmaceuticals lost money at the earnings before interest and tax (EBIT) line. Indeed, in that time it burnt through US$102m of cash and made a loss of US$134m. While this does make the company a bit risky, it's important to remember it has net cash of US$245.2m. That kitty means the company can keep spending for growth for at least two years, at current rates. Importantly, Tarsus Pharmaceuticals's revenue growth is hot to trot. 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. But ultimately, every company can contain risks that exist outside of the balance sheet. For example, we've discovered 1 warning sign for Tarsus Pharmaceuticals that you should be aware of before investing here.

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.