Legendary fund manager Li Lu (who Charlie Munger backed) once said, 'The biggest investment risk is not the volatility of prices, but whether you will suffer a permanent loss of capital.' 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. Importantly, Revolution Medicines, Inc. (NASDAQ:RVMD) does carry debt. But is this debt a concern to shareholders?

Why Does Debt Bring Risk?

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. Of course, debt can be an important tool in businesses, particularly capital heavy businesses. When we examine debt levels, we first consider both cash and debt levels, together.

What Is Revolution Medicines's Net Debt?

The image below, which you can click on for greater detail, shows that at December 2023 Revolution Medicines had debt of US$87.9m, up from none in one year. But it also has US$1.85b in cash to offset that, meaning it has US$1.77b net cash.

How Healthy Is Revolution Medicines' Balance Sheet?

According to the last reported balance sheet, Revolution Medicines had liabilities of US$143.9m due within 12 months, and liabilities of US$91.7m due beyond 12 months. Offsetting these obligations, it had cash of US$1.85b as well as receivables valued at US$1.25m due within 12 months. So it actually has US$1.62b more liquid assets than total liabilities.

It's good to see that Revolution Medicines has plenty of liquidity on its balance sheet, suggesting conservative management of liabilities. Given it has easily adequate short term liquidity, we don't think it will have any issues with its lenders. Simply put, the fact that Revolution Medicines 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 Revolution Medicines'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 Revolution Medicines had a loss before interest and tax, and actually shrunk its revenue by 87%, to US$4.6m. That makes us nervous, to say the least.

So How Risky Is Revolution Medicines?

By their very nature companies that are losing money are more risky than those with a long history of profitability. And the fact is that over the last twelve months Revolution Medicines lost money at the earnings before interest and tax (EBIT) line. Indeed, in that time it burnt through US$358m of cash and made a loss of US$484m. But the saving grace is the US$1.77b on the balance sheet. That kitty means the company can keep spending for growth for at least two years, at current rates. 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. Be aware that Revolution Medicines is showing 3 warning signs in our investment analysis , and 1 of those makes us a bit uncomfortable...

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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