Warren Buffett famously said, 'Volatility is far from synonymous with risk.' So it might be obvious that you need to consider debt, when you think about how risky any given stock is, because too much debt can sink a company. We can see that Centessa Pharmaceuticals plc (NASDAQ:CNTA) does use debt in its business. But the more important question is: how much risk is that debt creating?

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. Part and parcel of capitalism is the process of 'creative destruction' where failed businesses are mercilessly liquidated by their bankers. However, a more frequent (but still costly) occurrence is where a company must issue shares at bargain-basement prices, permanently diluting shareholders, just to shore up its balance sheet. 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. The first thing to do when considering how much debt a business uses is to look at its cash and debt together.

Check out our latest analysis for Centessa Pharmaceuticals

What Is Centessa Pharmaceuticals's Debt?

The chart below, which you can click on for greater detail, shows that Centessa Pharmaceuticals had US$75.7m in debt in September 2024; about the same as the year before. However, its balance sheet shows it holds US$518.4m in cash, so it actually has US$442.7m net cash.

How Strong Is Centessa Pharmaceuticals' Balance Sheet?

According to the last reported balance sheet, Centessa Pharmaceuticals had liabilities of US$26.4m due within 12 months, and liabilities of US$84.2m due beyond 12 months. Offsetting this, it had US$518.4m in cash and US$40.0m in receivables that were due within 12 months. So it can boast US$447.9m more liquid assets than total liabilities.

This surplus suggests that Centessa Pharmaceuticals is using debt in a way that is appears to be both safe and conservative. Because it has plenty of assets, it is unlikely to have trouble with its lenders. Succinctly put, Centessa Pharmaceuticals 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 Centessa Pharmaceuticals can strengthen its balance sheet over time. So if you're focused on the future you can check out this free report showing analyst profit forecasts.

While it hasn't made a profit, at least Centessa Pharmaceuticals booked its first revenue as a publicly listed company, in the last twelve months.

So How Risky Is Centessa Pharmaceuticals?

We have no doubt that loss making companies are, in general, riskier than profitable ones. And we do note that Centessa Pharmaceuticals had an earnings before interest and tax (EBIT) loss, over the last year. Indeed, in that time it burnt through US$130m of cash and made a loss of US$161m. While this does make the company a bit risky, it's important to remember it has net cash of US$442.7m. 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 Centessa Pharmaceuticals you should be aware of, and 1 of them shouldn't be ignored.

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.

Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team (at) simplywallst.com.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.