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. Importantly, Celcuity Inc. (NASDAQ:CELC) does carry debt. 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. 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.

What Is Celcuity's Debt?

The image below, which you can click on for greater detail, shows that at June 2024 Celcuity had debt of US$96.2m, up from US$36.0m in one year. But it also has US$283.1m in cash to offset that, meaning it has US$186.9m net cash.

A Look At Celcuity's Liabilities

According to the last reported balance sheet, Celcuity had liabilities of US$19.5m due within 12 months, and liabilities of US$96.3m due beyond 12 months. On the other hand, it had cash of US$283.1m and US$38.3k worth of receivables due within a year. So it actually has US$167.2m more liquid assets than total liabilities.

It's good to see that Celcuity has plenty of liquidity on its balance sheet, suggesting conservative management of liabilities. Due to its strong net asset position, it is not likely to face issues with its lenders. Succinctly put, Celcuity 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 ultimately the future profitability of the business will decide if Celcuity can strengthen its balance sheet over time. 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, Celcuity shareholders no doubt hope it can fund itself until it has a profitable product.

So How Risky Is Celcuity?

We have no doubt that loss making companies are, in general, riskier than profitable ones. And in the last year Celcuity 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$67m and booked a US$83m accounting loss. But the saving grace is the US$186.9m on the balance sheet. That kitty means the company can keep spending for growth for at least two years, at current rates. 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. However, not all investment risk resides within the balance sheet - far from it. Case in point: We've spotted 3 warning signs for Celcuity you should be aware of, and 2 of them are a bit unpleasant.

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.