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 Codexis, Inc. (NASDAQ:CDXS) does use debt in its business. But is this debt a concern to shareholders?

What Risk Does Debt Bring?

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. In the worst case scenario, a company can go bankrupt if it cannot pay its creditors. 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?

The image below, which you can click on for greater detail, shows that at March 2024 Codexis had debt of US$28.1m, up from none in one year. However, its balance sheet shows it holds US$85.5m in cash, so it actually has US$57.4m net cash.

How Strong Is Codexis' Balance Sheet?

The latest balance sheet data shows that Codexis had liabilities of US$29.1m due within a year, and liabilities of US$41.2m falling due after that. On the other hand, it had cash of US$85.5m and US$14.2m worth of receivables due within a year. So it actually has US$29.4m 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. Simply put, the fact that Codexis has more cash than debt is arguably a good indication that it can manage its debt safely. There's no doubt that we learn most about debt from the balance sheet. But ultimately the future profitability of the business will decide if Codexis can strengthen its balance sheet over time. 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$74m, which is a fall of 36%. That makes us nervous, to say the least.

So How Risky Is Codexis?

We have no doubt that loss making companies are, in general, riskier than profitable ones. And we do note that Codexis had an earnings before interest and tax (EBIT) loss, over the last year. And over the same period it saw negative free cash outflow of US$57m and booked a US$65m accounting loss. But at least it has US$57.4m 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. To that end, you should learn about the 3 warning signs we've spotted with Codexis (including 1 which can't be ignored) .

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.