The external fund manager backed by Berkshire Hathaway's Charlie Munger, Li Lu, makes no bones about it when he says '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 can see that Codexis, Inc. (NASDAQ:CDXS) does use debt in its business. But should shareholders be worried about its use of debt?

When Is Debt Dangerous?

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. Part and parcel of capitalism is the process of 'creative destruction' where failed businesses are mercilessly liquidated by their bankers. However, a more frequent (but still costly) occurrence is where a company must issue shares at bargain-basement prices, permanently diluting shareholders, just to shore up its balance sheet. Of course, plenty of companies use debt to fund growth, without any negative consequences. The first step when considering a company's debt levels is to consider its cash and debt together.

What Is Codexis's Debt?

As you can see below, at the end of September 2024, Codexis had US$28.6m of debt, up from none a year ago. Click the image for more detail. However, it does have US$90.3m in cash offsetting this, leading to net cash of US$61.6m.

How Healthy Is Codexis' Balance Sheet?

We can see from the most recent balance sheet that Codexis had liabilities of US$35.1m falling due within a year, and liabilities of US$39.7m due beyond that. Offsetting these obligations, it had cash of US$90.3m as well as receivables valued at US$16.5m due within 12 months. So it actually has US$32.0m more liquid assets than total liabilities.

This short term liquidity is a sign that Codexis could probably pay off its debt with ease, as its balance sheet is far from stretched. Succinctly put, Codexis boasts net cash, so it's fair to say it does not have a heavy debt load! 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 Codexis'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, Codexis made a loss at the EBIT level, and saw its revenue drop to US$64m, which is a fall of 13%. We would much prefer see growth.

So How Risky Is Codexis?

Statistically speaking companies that lose money are riskier than those that make money. And we do note that Codexis had an earnings before interest and tax (EBIT) loss, over the last year. Indeed, in that time it burnt through US$46m of cash and made a loss of US$62m. But at least it has US$61.6m 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. There's no doubt that we learn most about debt from the balance sheet. However, not all investment risk resides within the balance sheet - far from it. Be aware that Codexis is showing 2 warning signs in our investment analysis , you should know about...

At the end of the day, it's often better to focus on companies that are free from net debt. You can access our special list of such companies (all with a track record of profit growth). It's free.

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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.