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David Iben put it well when he said, 'Volatility is not a risk we care about. What we care about is avoiding the permanent loss of capital.' 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 note that Alkermes plc (NASDAQ:ALKS) does have debt on its balance sheet. But the more important question is: how much risk is that debt creating?
Why Does Debt Bring Risk?
Debt assists a business until the business has trouble paying it off, either with new capital or with free cash flow. Ultimately, if the company can't fulfill its legal obligations to repay debt, shareholders could walk away with nothing. 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. When we examine debt levels, we first consider both cash and debt levels, together.
How Much Debt Does Alkermes Carry?
As you can see below, Alkermes had US$276.1m of debt, at June 2020, which is about the same as the year before. You can click the chart for greater detail. But it also has US$532.6m in cash to offset that, meaning it has US$256.5m net cash.
A Look At Alkermes's Liabilities
The latest balance sheet data shows that Alkermes had liabilities of US$321.4m due within a year, and liabilities of US$419.1m falling due after that. Offsetting these obligations, it had cash of US$532.6m as well as receivables valued at US$246.6m due within 12 months. So it can boast US$38.7m more liquid assets than total liabilities.
This state of affairs indicates that Alkermes's balance sheet looks quite solid, as its total liabilities are just about equal to its liquid assets. So while it's hard to imagine that the US$2.72b company is struggling for cash, we still think it's worth monitoring its balance sheet. Succinctly put, Alkermes 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 Alkermes 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.
Over 12 months, Alkermes reported revenue of US$1.2b, which is a gain of 8.8%, although it did not report any earnings before interest and tax. We usually like to see faster growth from unprofitable companies, but each to their own.
So How Risky Is Alkermes?
We have no doubt that loss making companies are, in general, riskier than profitable ones. And we do note that Alkermes had an earnings before interest and tax (EBIT) loss, over the last year. And over the same period it saw negative free cash outflow of US$53m and booked a US$126m accounting loss. While this does make the company a bit risky, it's important to remember it has net cash of US$256.5m. That means it could keep spending at its current rate for more than two years. 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. The balance sheet is clearly the area to focus on when you are analysing debt. But ultimately, every company can contain risks that exist outside of the balance sheet. Consider for instance, the ever-present spectre of investment risk. We've identified 1 warning sign with Alkermes , and understanding them should be part of your investment process.
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.
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. 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.
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