Legendary fund manager Li Lu (who Charlie Munger backed) once said, '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 Bicycle Therapeutics plc (NASDAQ:BCYC) makes use of debt. But is this debt a concern to shareholders?

When Is Debt A Problem?

Debt assists a business until the business has trouble paying it off, either with new capital or with free cash flow. If things get really bad, the lenders can take control of the business. However, a more common (but still painful) scenario is that it has to raise new equity capital at a low price, thus permanently diluting shareholders. 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 examine debt levels, we first consider both cash and debt levels, together.

How Much Debt Does Bicycle Therapeutics Carry?

The chart below, which you can click on for greater detail, shows that Bicycle Therapeutics had US$30.7m in debt in December 2023; about the same as the year before. But on the other hand it also has US$526.4m in cash, leading to a US$495.7m net cash position.

How Strong Is Bicycle Therapeutics' Balance Sheet?

We can see from the most recent balance sheet that Bicycle Therapeutics had liabilities of US$69.5m falling due within a year, and liabilities of US$154.9m due beyond that. Offsetting these obligations, it had cash of US$526.4m as well as receivables valued at US$24.0m due within 12 months. So it actually has US$326.1m more liquid assets than total liabilities.

This luscious liquidity implies that Bicycle Therapeutics' balance sheet is sturdy like a giant sequoia tree. On this view, lenders should feel as safe as the beloved of a black-belt karate master. Succinctly put, Bicycle Therapeutics 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 ultimately the future profitability of the business will decide if Bicycle Therapeutics can strengthen its balance sheet over time. So if you're focused on the future you can check out this free report showing analyst profit forecasts.

Over 12 months, Bicycle Therapeutics reported revenue of US$27m, which is a gain of 87%, 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 Bicycle Therapeutics?

By their very nature companies that are losing money are more risky than those with a long history of profitability. And we do note that Bicycle Therapeutics had an earnings before interest and tax (EBIT) loss, over the last year. Indeed, in that time it burnt through US$64m of cash and made a loss of US$181m. While this does make the company a bit risky, it's important to remember it has net cash of US$495.7m. That means it could keep spending at its current rate for more than two years. With very solid revenue growth in the last year, Bicycle Therapeutics may be on a path to profitability. By investing before those profits, shareholders take on more risk in the hope of bigger 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. For instance, we've identified 2 warning signs for Bicycle Therapeutics that you should be aware of.

Of course, if you're the type of investor who prefers buying stocks without the burden of debt, then don't hesitate to discover our exclusive list of net cash growth stocks, today.

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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.