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.' When we think about how risky a company is, we always like to look at its use of debt, since debt overload can lead to ruin. We can see that NovoCure Limited (NASDAQ:NVCR) does use debt in its business. But the real question is whether this debt is making the company risky.

What Risk Does Debt Bring?

Debt and other liabilities become risky for a business when it cannot easily fulfill those obligations, either with free cash flow or by raising capital at an attractive price. 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, debt can be an important tool in businesses, particularly capital heavy businesses. The first thing to do when considering how much debt a business uses is to look at its cash and debt together.

What Is NovoCure's Net Debt?

You can click the graphic below for the historical numbers, but it shows that as of June 2024 NovoCure had US$653.5m of debt, an increase on US$567.2m, over one year. However, its balance sheet shows it holds US$951.2m in cash, so it actually has US$297.7m net cash.

A Look At NovoCure's Liabilities

According to the last reported balance sheet, NovoCure had liabilities of US$169.2m due within 12 months, and liabilities of US$681.2m due beyond 12 months. Offsetting these obligations, it had cash of US$951.2m as well as receivables valued at US$97.6m due within 12 months. So it can boast US$198.3m more liquid assets than total liabilities.

This surplus suggests that NovoCure has a conservative balance sheet, and could probably eliminate its debt without much difficulty. Simply put, the fact that NovoCure has more cash than debt is arguably a good indication that it can manage its debt safely. When analysing debt levels, the balance sheet is the obvious place to start. But it is future earnings, more than anything, that will determine NovoCure'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 NovoCure wasn't profitable at an EBIT level, but managed to grow its revenue by 8.3%, to US$550m. We usually like to see faster growth from unprofitable companies, but each to their own.

So How Risky Is NovoCure?

Statistically speaking companies that lose money are riskier than those that make money. And in the last year NovoCure had an earnings before interest and tax (EBIT) loss, truth be told. And over the same period it saw negative free cash outflow of US$104m and booked a US$169m accounting loss. While this does make the company a bit risky, it's important to remember it has net cash of US$297.7m. That kitty means the company can keep spending for growth for at least two years, at current rates. Even though its balance sheet seems sufficiently liquid, debt always makes us a little nervous if a company doesn't produce free cash flow regularly. There's no doubt that we learn most about debt from the balance sheet. However, not all investment risk resides within the balance sheet - far from it. These risks can be hard to spot. Every company has them, and we've spotted 2 warning signs for NovoCure you should know about.

If, after all that, you're more interested in a fast growing company with a rock-solid balance sheet, then check out our list of net cash growth stocks without delay.

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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.