Warren Buffett famously said, '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, Alkermes plc (NASDAQ:ALKS) does carry debt. But the real question is whether this debt is making the company risky.
Why Does Debt Bring Risk?
Debt and other liabilities become risky for a business when it cannot easily fulfill those obligations, either with free cash flow or by raising capital at an attractive price. Ultimately, if the company can't fulfill its legal obligations to repay debt, shareholders could walk away with nothing. While that is not too common, we often do see indebted companies permanently diluting shareholders because lenders force them to raise capital at a distressed price. Of course, the upside of debt is that it often represents cheap capital, especially when it replaces dilution in a company with the ability to reinvest 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.
What Is Alkermes's Debt?
The chart below, which you can click on for greater detail, shows that Alkermes had US$277.1m in debt in December 2019; about the same as the year before. However, it does have US$535.0m in cash offsetting this, leading to net cash of US$257.8m.
How Strong Is Alkermes's Balance Sheet?
We can see from the most recent balance sheet that Alkermes had liabilities of US$391.1m falling due within a year, and liabilities of US$328.8m due beyond that. Offsetting this, it had US$535.0m in cash and US$265.5m in receivables that were due within 12 months. So it actually has US$80.5m more liquid assets than total liabilities.
This surplus suggests that Alkermes has a conservative balance sheet, and could probably eliminate its debt without much difficulty. 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 it is future earnings, more than anything, that will determine Alkermes'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 Alkermes wasn't profitable at an EBIT level, but managed to grow its revenue by 7.0%, to US$1.2b. That rate of growth is a bit slow for our taste, but it takes all types to make a world.
So How Risky Is Alkermes?
Statistically speaking companies that lose money are riskier than those that make money. And in the last year Alkermes had negative earnings before interest and tax (EBIT), truth be told. And over the same period it saw negative free cash outflow of US$19m and booked a US$197m accounting loss. But the saving grace is the US$257.8m on the balance sheet. 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. When analysing debt levels, the balance sheet is the obvious place to start. But ultimately, every company can contain risks that exist outside of the balance sheet. Consider risks, for instance. Every company has them, and we've spotted 2 warning signs for Alkermes you should know about.
At the end of the day, it's often better to focus on companies that are free from net debt. You can access our special list of such companies (all with a track record of profit growth). It's free.
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