Some say volatility, rather than debt, is the best way to think about risk as an investor, but Warren Buffett famously said that ‘Volatility is far from synonymous with risk.’ 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. We note that ChemoCentryx, Inc. (NASDAQ:CCXI) does have debt on its balance sheet. But the more important question is: how much risk is that debt creating?

When Is Debt A Problem?

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.

What Is ChemoCentryx’s Debt?

As you can see below, ChemoCentryx had US$23.6m of debt, at September 2021, which is about the same as the year before. You can click the chart for greater detail. But it also has US$269.4m in cash to offset that, meaning it has US$245.9m net cash.

How Healthy Is ChemoCentryx’s Balance Sheet?

We can see from the most recent balance sheet that ChemoCentryx had liabilities of US$60.0m falling due within a year, and liabilities of US$78.9m due beyond that. Offsetting this, it had US$269.4m in cash and US$20.1m in receivables that were due within 12 months. So it actually has US$150.5m more liquid assets than total liabilities.

This surplus suggests that ChemoCentryx has a conservative balance sheet, and could probably eliminate its debt without much difficulty. Simply put, the fact that ChemoCentryx has more cash than debt is arguably a good indication that it can manage its debt safely. 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 ChemoCentryx can strengthen its balance sheet over time.

Over 12 months, ChemoCentryx made a loss at the EBIT level, and saw its revenue drop to US$34m, which is a fall of 51%. To be frank that doesn’t bode well.

So How Risky Is ChemoCentryx?

By their very nature companies that are losing money are more risky than those with a long history of profitability. And in the last year ChemoCentryx 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$112m and booked a US$121m accounting loss. But at least it has US$245.9m on the balance sheet to spend on growth, near-term. Even though its balance sheet seems sufficiently liquid, debt always makes us a little nervous if a company doesn’t produce free cash flow regularly.