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 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. Importantly, Apellis Pharmaceuticals, Inc. (NASDAQ:APLS) does carry debt. But is this debt a concern to shareholders?

What Risk Does Debt Bring?

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. In the worst case scenario, a company can go bankrupt if it cannot pay its creditors. 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. Having said that, the most common situation is where a company manages its debt reasonably well - and to its own advantage. When we think about a company's use of debt, we first look at cash and debt together.

What Is Apellis Pharmaceuticals's Debt?

The chart below, which you can click on for greater detail, shows that Apellis Pharmaceuticals had US$93.1m in debt in March 2024; about the same as the year before. However, its balance sheet shows it holds US$333.5m in cash, so it actually has US$240.4m net cash.

How Strong Is Apellis Pharmaceuticals' Balance Sheet?

The latest balance sheet data shows that Apellis Pharmaceuticals had liabilities of US$215.3m due within a year, and liabilities of US$350.0m falling due after that. Offsetting these obligations, it had cash of US$333.5m as well as receivables valued at US$272.3m due within 12 months. So it actually has US$40.6m more liquid assets than total liabilities.

Having regard to Apellis Pharmaceuticals' size, it seems that its liquid assets are well balanced with its total liabilities. So while it's hard to imagine that the US$4.86b company is struggling for cash, we still think it's worth monitoring its balance sheet. Succinctly put, Apellis Pharmaceuticals boasts net cash, so it's fair to say it does not have a heavy debt load! When analysing debt levels, the balance sheet is the obvious place to start. 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.

In the last year Apellis Pharmaceuticals wasn't profitable at an EBIT level, but managed to grow its revenue by 395%, to US$524m. When it comes to revenue growth, that's like nailing the game winning 3-pointer!

So How Risky Is Apellis Pharmaceuticals?

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 Apellis Pharmaceuticals lost money at the earnings before interest and tax (EBIT) line. Indeed, in that time it burnt through US$551m of cash and made a loss of US$417m. Given it only has net cash of US$240.4m, the company may need to raise more capital if it doesn't reach break-even soon. Importantly, Apellis Pharmaceuticals's revenue growth is hot to trot. High growth pre-profit companies may well be risky, but they can also offer great rewards. 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. For example - Apellis Pharmaceuticals has 2 warning signs we think you should be aware of.

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.

Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team@simplywallst.com