Warren Buffett famously said, 'Volatility is far from synonymous with risk.' 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. 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.

When Is Debt Dangerous?

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. 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.

How Much Debt Does NovoCure Carry?

As you can see below, NovoCure had US$568.8m of debt, at December 2023, which is about the same as the year before. You can click the chart for greater detail. But it also has US$910.6m in cash to offset that, meaning it has US$341.8m net cash.

How Strong Is NovoCure's Balance Sheet?

The latest balance sheet data shows that NovoCure had liabilities of US$179.1m due within a year, and liabilities of US$604.5m falling due after that. Offsetting these obligations, it had cash of US$910.6m as well as receivables valued at US$66.5m due within 12 months. So it can boast US$193.5m more liquid assets than total liabilities.

This short term liquidity is a sign that NovoCure could probably pay off its debt with ease, as its balance sheet is far from stretched. Simply put, the fact that NovoCure has more cash than debt is arguably a good indication that it can manage its debt safely. There's no doubt that we learn most about debt from the balance sheet. 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 want to see what the professionals think, you might find this free report on analyst profit forecasts to be interesting.

In the last year NovoCure had a loss before interest and tax, and actually shrunk its revenue by 5.3%, to US$509m. We would much prefer see growth.

So How Risky Is NovoCure?

We have no doubt that loss making companies are, in general, riskier than profitable ones. 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$100m and booked a US$207m accounting loss. While this does make the company a bit risky, it's important to remember it has net cash of US$341.8m. 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. 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. Case in point: We've spotted 2 warning signs for NovoCure you should be aware of.

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.