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.' So it might be obvious that you need to consider debt, when you think about how risky any given stock is, because too much debt can sink a company. As with many other companies Scholar Rock Holding Corporation (NASDAQ:SRRK) makes use of debt. But should shareholders be worried about its use of debt?

When Is Debt A Problem?

Generally speaking, debt only becomes a real problem when a company can't easily pay it off, either by raising capital or with its own cash flow. Ultimately, if the company can't fulfill its legal obligations to repay debt, shareholders could walk away with nothing. While that is not too common, we often do see indebted companies permanently diluting shareholders because lenders force them to raise capital at a distressed price. Of course, the upside of debt is that it often represents cheap capital, especially when it replaces dilution in a company with the ability to reinvest at high rates of return. The first step when considering a company's debt levels is to consider its cash and debt together.

What Is Scholar Rock Holding's Debt?

As you can see below, Scholar Rock Holding had US$50.1m of debt, at March 2024, which is about the same as the year before. You can click the chart for greater detail. But on the other hand it also has US$238.4m in cash, leading to a US$188.3m net cash position.

How Strong Is Scholar Rock Holding's Balance Sheet?

We can see from the most recent balance sheet that Scholar Rock Holding had liabilities of US$37.5m falling due within a year, and liabilities of US$47.0m due beyond that. On the other hand, it had cash of US$238.4m and US$1.12m worth of receivables due within a year. So it can boast US$155.0m more liquid assets than total liabilities.

This surplus suggests that Scholar Rock Holding has a conservative balance sheet, and could probably eliminate its debt without much difficulty. Succinctly put, Scholar Rock Holding 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 Scholar Rock Holding'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.

Since Scholar Rock Holding doesn't have significant operating revenue, shareholders may be hoping it comes up with a great new product, before it runs out of money.

So How Risky Is Scholar Rock Holding?

Statistically speaking companies that lose money are riskier than those that make money. And we do note that Scholar Rock Holding had an earnings before interest and tax (EBIT) loss, over the last year. Indeed, in that time it burnt through US$152m of cash and made a loss of US$183m. However, it has net cash of US$188.3m, so it has a bit of time before it will need more capital. 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. 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 5 warning signs with Scholar Rock Holding (at least 1 which can't be ignored) , and understanding them should be part of your investment process.

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.