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. We can see that Alkermes plc (NASDAQ:ALKS) does use debt in its business. But the more important question is: how much risk is that debt creating?
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. Part and parcel of capitalism is the process of 'creative destruction' where failed businesses are mercilessly liquidated by their bankers. 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.
How Much Debt Does Alkermes Carry?
As you can see below, Alkermes had US$278.2m of debt, at June 2019, which is about the same the year before. You can click the chart for greater detail. But on the other hand it also has US$570.3m in cash, leading to a US$292.1m net cash position.
How Strong Is Alkermes's Balance Sheet?
Zooming in on the latest balance sheet data, we can see that Alkermes had liabilities of US$334.1m due within 12 months and liabilities of US$326.4m due beyond that. Offsetting these obligations, it had cash of US$570.3m as well as receivables valued at US$273.9m due within 12 months. So it can boast US$183.6m more liquid assets than total liabilities.
This short term liquidity is a sign that Alkermes could probably pay off its debt with ease, as its balance sheet is far from stretched. Succinctly put, Alkermes boasts net cash, so it's fair to say it does not have a heavy debt load! The balance sheet is clearly the area to focus on when you are analysing debt. But ultimately the future profitability of the business will decide if Alkermes can strengthen its balance sheet over time. 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, Alkermes reported revenue of US$1.1b, which is a gain of 4.4%. We usually like to see faster growth from unprofitable companies, but each to their own.
So How Risky Is Alkermes?
Although Alkermes had negative earnings before interest and tax (EBIT) over the last twelve months, it generated positive free cash flow of US$19m. So although it is loss-making, it doesn't seem to have too much near-term balance sheet risk, keeping in mind the net cash. With mediocre revenue growth in the last year, we're don't find the investment opportunity particularly compelling. For riskier companies like Alkermes I always like to keep an eye on the long term profit and revenue trends. Fortunately, you can click to see our interactive graph of its profit, revenue, and operating cashflow.
Of course, if you're the type of investor who prefers buying stocks without the burden of debt, then don't hesitate to discover our exclusive list of net cash growth stocks, today.
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