The fund manager backed by Berkshire Hathaway’s Charlie Munger, Li Lu, emphasizes that the biggest investment risk is not price volatility, but the potential for a permanent loss of capital. When assessing company risk, it is important to consider its use of debt, as excessive debt can lead to financial ruin. Arcellx, Inc. (NASDAQ:ACLX) does have debt on its balance sheet, but the key question is how risky this debt is.
Debt becomes a problem when a company struggles to repay it, potentially leading to loss of control or shareholder dilution. However, some companies use debt to fuel growth without negative consequences. When evaluating debt levels, it is crucial to consider both cash and debt positions.
At the end of December 2023, Arcellx had $97.6 million in debt, up from zero the previous year. However, the company also held $702.0 million in cash, resulting in a net cash position of $604.4 million.
The balance sheet indicates that Arcellx had $118.2 million in liabilities due within a year, with $221.5 million due after that. Offsetting these obligations, the company had $702.0 million in cash and $38.6 million in receivables due within 12 months, resulting in $400.9 million more in liquid assets than total liabilities.
With ample liquidity on its balance sheet, Arcellx appears to manage its liabilities conservatively. The company’s net cash position suggests a manageable debt load. While debt levels are important, future earnings will ultimately determine Arcellx’s ability to maintain a healthy balance sheet. The company reported significant revenue growth over the past year, indicating potential for further growth.
Although Arcellx reported an EBIT loss, positive free cash flow and strong revenue growth suggest a promising outlook. While analyzing debt levels is crucial, it is important to consider risks beyond the balance sheet. Investors should be aware of warning signs, including those specific to Arcellx.
In conclusion, Arcellx’s net cash position and revenue growth indicate a relatively low level of risk in the near term. Investors interested in a fast-growing company with a strong balance sheet may find Arcellx appealing.
Please note that this article provides general commentary based on historical data and analyst forecasts, and does not constitute financial advice. Investors should conduct their own research before making investment decisions.