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. As with many other companies Bicycle Therapeutics plc (NASDAQ:BCYC) makes use of debt. But the real question is whether this debt is making the company risky.

When Is Debt Dangerous?

Debt is a tool to help businesses grow, but if a business is incapable of paying off its lenders, then it exists at their mercy. Part and parcel of capitalism is the process of 'creative destruction' where failed businesses are mercilessly liquidated by their bankers. 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.

How Much Debt Does Bicycle Therapeutics Carry?

As you can see below, Bicycle Therapeutics had US$30.9m of debt, at June 2024, which is about the same as the year before. You can click the chart for greater detail. But on the other hand it also has US$961.4m in cash, leading to a US$930.5m net cash position.

How Healthy Is Bicycle Therapeutics' Balance Sheet?

We can see from the most recent balance sheet that Bicycle Therapeutics had liabilities of US$69.6m falling due within a year, and liabilities of US$113.9m due beyond that. Offsetting these obligations, it had cash of US$961.4m as well as receivables valued at US$46.7m due within 12 months. So it actually has US$824.5m more liquid assets than total liabilities.

This luscious liquidity implies that Bicycle Therapeutics' balance sheet is sturdy like a giant sequoia tree. With this in mind one could posit that its balance sheet means the company is able to handle some adversity. Succinctly put, Bicycle Therapeutics boasts net cash, so it's fair to say it does not have a heavy debt load! When analysing debt levels, the balance sheet is the obvious place to start. But it is future earnings, more than anything, that will determine Bicycle Therapeutics'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, Bicycle Therapeutics reported revenue of US$40m, which is a gain of 76%, 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?

We have no doubt that loss making companies are, in general, riskier than profitable ones. And the fact is that over the last twelve months Bicycle Therapeutics lost money at the earnings before interest and tax (EBIT) line. Indeed, in that time it burnt through US$165m of cash and made a loss of US$165m. While this does make the company a bit risky, it's important to remember it has net cash of US$930.5m. That kitty means the company can keep spending for growth for at least two years, at current rates. Bicycle Therapeutics's revenue growth shone bright over the last year, so it may well be in a position to turn a profit in due course. By investing before those profits, shareholders take on more risk in the hope of bigger rewards. 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. For example Bicycle Therapeutics has 3 warning signs (and 1 which can't be ignored) we think you should know about.

If you're interested in investing in businesses that can grow profits without the burden of debt, then check out this free list of growing businesses that have net cash on the balance sheet.

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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.