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.' 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. As with many other companies Cerus Corporation (NASDAQ:CERS) makes use of debt. But the real question is whether this debt is making the company risky.

When Is Debt A Problem?

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. Part and parcel of capitalism is the process of 'creative destruction' where failed businesses are mercilessly liquidated by their bankers. 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. By replacing dilution, though, debt can be an extremely good tool for businesses that need capital to invest in growth at high rates of return. When we think about a company's use of debt, we first look at cash and debt together.

View our latest analysis for Cerus

What Is Cerus's Debt?

You can click the graphic below for the historical numbers, but it shows that as of June 2022 Cerus had US$69.7m of debt, an increase on US$64.0m, over one year. But it also has US$107.0m in cash to offset that, meaning it has US$37.3m net cash.

How Healthy Is Cerus' Balance Sheet?

According to the last reported balance sheet, Cerus had liabilities of US$79.3m due within 12 months, and liabilities of US$60.4m due beyond 12 months. Offsetting these obligations, it had cash of US$107.0m as well as receivables valued at US$26.8m due within 12 months. So it has liabilities totalling US$5.81m more than its cash and near-term receivables, combined.

This state of affairs indicates that Cerus' balance sheet looks quite solid, as its total liabilities are just about equal to its liquid assets. So while it's hard to imagine that the US$756.2m company is struggling for cash, we still think it's worth monitoring its balance sheet. Despite its noteworthy liabilities, Cerus 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 Cerus'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, Cerus reported revenue of US$154m, which is a gain of 45%, although it did not report any earnings before interest and tax. Shareholders probably have their fingers crossed that it can grow its way to profits.

So How Risky Is Cerus?

Statistically speaking companies that lose money are riskier than those that make money. And the fact is that over the last twelve months Cerus lost money at the earnings before interest and tax (EBIT) line. And over the same period it saw negative free cash outflow of US$30m and booked a US$42m accounting loss. But at least it has US$37.3m on the balance sheet to spend on growth, near-term. With very solid revenue growth in the last year, Cerus may be on a path to profitability. Pre-profit companies are often risky, but they can also offer great rewards. The balance sheet is clearly the area to focus on when you are analysing debt. 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 Cerus you should know about.

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.