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Is Akorn (NASDAQ:AKRX) A Risky Investment?

Simply Wall St

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.' So it seems the smart money knows that debt - which is usually involved in bankruptcies - is a very important factor, when you assess how risky a company is. Importantly, Akorn, Inc. (NASDAQ:AKRX) does carry debt. But is this debt a concern to shareholders?

Why Does Debt Bring Risk?

Generally speaking, debt only becomes a real problem when a company can't easily pay it off, either by raising capital or with its own cash flow. If things get really bad, the lenders can take control of the business. However, a more usual (but still expensive) situation is where a company must dilute shareholders at a cheap share price simply to get debt under control. Having said that, the most common situation is where a company manages its debt reasonably well - and to its own advantage. The first thing to do when considering how much debt a business uses is to look at its cash and debt together.

View our latest analysis for Akorn

What Is Akorn's Debt?

As you can see below, Akorn had US$828.3m of debt, at June 2019, which is about the same the year before. You can click the chart for greater detail. However, it also had US$178.3m in cash, and so its net debt is US$650.0m.

NasdaqGS:AKRX Historical Debt, August 14th 2019

How Healthy Is Akorn's Balance Sheet?

The latest balance sheet data shows that Akorn had liabilities of US$1.03b due within a year, and liabilities of US$121.3m falling due after that. On the other hand, it had cash of US$178.3m and US$172.6m worth of receivables due within a year. So its liabilities total US$802.1m more than the combination of its cash and short-term receivables.

This deficit casts a shadow over the US$354.5m company, like a colossus towering over mere mortals. So we'd watch its balance sheet closely, without a doubt After all, Akorn would likely require a major re-capitalisation if it had to pay its creditors today. When analysing debt levels, the balance sheet is the obvious place to start. But it is future earnings, more than anything, that will determine Akorn'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.

In the last year Akorn actually shrunk its revenue by 13%, to US$663m. That's not what we would hope to see.

Caveat Emptor

While Akorn's falling revenue is about as heartwarming as a wet blanket, arguably its earnings before interest and tax (EBIT) loss is even less appealing. Its EBIT loss was a whopping US$146m. Considering that alongside the liabilities mentioned above make us nervous about the company. We'd want to see some strong near-term improvements before getting too interested in the stock. Not least because it had negative free cash flow of US$117m over the last twelve months. That means it's on the risky side of things. When I consider a company to be a bit risky, I think it is responsible to check out whether insiders have been reporting any share sales. Luckily, you can click here ito see our graphic depicting Akorn insider transactions.

If, after all that, you're more interested in a fast growing company with a rock-solid balance sheet, then check out our list of net cash growth stocks without delay.

We aim to bring you long-term focused research analysis driven by fundamental data. Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative material.

If you spot an error that warrants correction, please contact the editor at editorial-team@simplywallst.com. This article by Simply Wall St is general in nature. It does not constitute a recommendation to buy or sell any stock, and does not take account of your objectives, or your financial situation. Simply Wall St has no position in the stocks mentioned. Thank you for reading.