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

When Is Debt Dangerous?

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. However, a more usual (but still expensive) situation is where a company must dilute shareholders at a cheap share price simply to get debt under control. Of course, debt can be an important tool in businesses, particularly capital heavy businesses. When we examine debt levels, we first consider both cash and debt levels, together.

How Much Debt Does Blueprint Medicines Carry?

As you can see below, at the end of June 2024, Blueprint Medicines had US$652.4m of debt, up from US$577.3m a year ago. Click the image for more detail. But it also has US$763.6m in cash to offset that, meaning it has US$111.2m net cash.

A Look At Blueprint Medicines' Liabilities

According to the last reported balance sheet, Blueprint Medicines had liabilities of US$243.8m due within 12 months, and liabilities of US$639.5m due beyond 12 months. On the other hand, it had cash of US$763.6m and US$85.1m worth of receivables due within a year. So it has liabilities totalling US$34.7m more than its cash and near-term receivables, combined.

This state of affairs indicates that Blueprint Medicines' balance sheet looks quite solid, as its total liabilities are just about equal to its liquid assets. So it's very unlikely that the US$5.91b company is short on cash, but still worth keeping an eye on the balance sheet. Despite its noteworthy liabilities, Blueprint Medicines boasts net cash, so it's fair to say it does not have a heavy debt load! 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 Blueprint Medicines'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, Blueprint Medicines reported revenue of US$363m, which is a gain of 61%, although it did not report any earnings before interest and tax. With any luck the company will be able to grow its way to profitability.

So How Risky Is Blueprint Medicines?

Statistically speaking companies that lose money are riskier than those that make money. And we do note that Blueprint Medicines had an earnings before interest and tax (EBIT) loss, over the last year. And over the same period it saw negative free cash outflow of US$348m and booked a US$205m accounting loss. But at least it has US$111.2m on the balance sheet to spend on growth, near-term. Blueprint Medicines's revenue growth shone bright over the last year, so it may well be in a position to turn a profit in due course. 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. For example - Blueprint Medicines has 2 warning signs we think you should be aware of.

At the end of the day, it's often better to focus on companies that are free from net debt. You can access our special list of such companies (all with a track record of profit growth). It's free.

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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.