Howard Marks put it nicely when he said that, rather than worrying about share price volatility, 'The possibility of permanent loss is the risk I worry about... and every practical investor I know worries about.' It's only natural to consider a company's balance sheet when you examine how risky it is, since debt is often involved when a business collapses. We note that Scholar Rock Holding Corporation (NASDAQ:SRRK) does have debt on its balance sheet. But the real question is whether this debt is making the company risky.

Why Does Debt Bring Risk?

Debt assists a business until the business has trouble paying it off, either with new capital or with free cash flow. 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. Having said that, the most common situation is where a company manages its debt reasonably well - and to its own advantage. The first thing to do when considering how much debt a business uses is to look at its cash and debt together.

What Is Scholar Rock Holding's Net Debt?

The chart below, which you can click on for greater detail, shows that Scholar Rock Holding had US$50.1m in debt in June 2024; about the same as the year before. But it also has US$190.5m in cash to offset that, meaning it has US$140.4m net cash.

How Healthy Is Scholar Rock Holding's Balance Sheet?

According to the last reported balance sheet, Scholar Rock Holding had liabilities of US$33.0m due within 12 months, and liabilities of US$60.3m due beyond 12 months. Offsetting this, it had US$190.5m in cash and US$1.29m in receivables that were due within 12 months. So it actually has US$98.5m more liquid assets than total liabilities.

This short term liquidity is a sign that Scholar Rock Holding could probably pay off its debt with ease, as its balance sheet is far from stretched. Simply put, the fact that Scholar Rock Holding has more cash than debt is arguably a good indication that it can manage its debt safely. 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 Scholar Rock Holding'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.

Given its lack of meaningful operating revenue, Scholar Rock Holding shareholders no doubt hope it can fund itself until it has a profitable product.

So How Risky Is Scholar Rock Holding?

Statistically speaking companies that lose money are riskier than those that make money. And in the last year Scholar Rock Holding 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$169m and booked a US$204m accounting loss. But at least it has US$140.4m on the balance sheet to spend on growth, near-term. Overall, its balance sheet doesn't seem overly risky, at the moment, but we're always cautious until we see the positive free cash flow. 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. Be aware that Scholar Rock Holding is showing 5 warning signs in our investment analysis , and 2 of those are significant...

When all is said and done, sometimes its easier to focus on companies that don't even need debt. Readers can access a list of growth stocks with zero net debt 100% free, right now.

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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.