Some say volatility, rather than debt, is the best way to think about risk as an investor, but Warren Buffett famously said that 'Volatility is far from synonymous with risk.' It's only natural to consider a company's balance sheet when you examine how risky it is, since debt is often involved when a business collapses. As with many other companies Apellis Pharmaceuticals, Inc. (NASDAQ:APLS) makes use of debt. But should shareholders be worried about its use of debt?

When Is Debt Dangerous?

Debt assists a business until the business has trouble paying it off, either with new capital or with free cash flow. 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. Having said that, the most common situation is where a company manages its debt reasonably well - and to its own advantage. The first thing to do when considering how much debt a business uses is to look at its cash and debt together.

How Much Debt Does Apellis Pharmaceuticals Carry?

As you can see below, at the end of June 2024, Apellis Pharmaceuticals had US$457.2m of debt, up from US$92.9m a year ago. Click the image for more detail. However, it does have US$368.0m in cash offsetting this, leading to net debt of about US$89.2m.

How Strong Is Apellis Pharmaceuticals' Balance Sheet?

The latest balance sheet data shows that Apellis Pharmaceuticals had liabilities of US$169.2m due within a year, and liabilities of US$471.0m falling due after that. Offsetting these obligations, it had cash of US$368.0m as well as receivables valued at US$308.9m due within 12 months. So it actually has US$36.7m more liquid assets than total liabilities.

This state of affairs indicates that Apellis Pharmaceuticals' balance sheet looks quite solid, as its total liabilities are just about equal to its liquid assets. So it's very unlikely that the US$3.47b company is short on cash, but still worth keeping an eye on the balance sheet. 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 Apellis Pharmaceuticals's ability to maintain a healthy balance sheet going forward. So if you want to see what the professionals think, you might find this free report on analyst profit forecasts to be interesting.

Over 12 months, Apellis Pharmaceuticals reported revenue of US$629m, which is a gain of 241%, although it did not report any earnings before interest and tax. That's virtually the hole-in-one of revenue growth!

Caveat Emptor

While we can certainly appreciate Apellis Pharmaceuticals's revenue growth, its earnings before interest and tax (EBIT) loss is not ideal. To be specific the EBIT loss came in at US$313m. Looking on the brighter side, the business has adequate liquid assets, which give it time to grow and develop before its debt becomes a near-term issue. Still, we'd be more encouraged to study the business in depth if it already had some free cash flow. Nonetheless, the revenue growth is clearly impressive and that would make it easier to raise capital if need be. Despite that strong positive, this one could still be considered a bit too risky, by some. 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. We've identified 2 warning signs with Apellis Pharmaceuticals , and understanding them should be part of your investment process.

If you're interested in investing in businesses that can grow profits without the burden of debt, then check out this free list of growing businesses that have net cash on the balance sheet.

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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.