Ascendis Pharma (NASDAQ:ASND) Is Using Debt Safely
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. As with many other companies Ascendis Pharma A/S (NASDAQ:ASND) makes use of debt. But should shareholders be worried about its use of debt?
When Is Debt A Problem?
Debt is a tool to help businesses grow, but if a business is incapable of paying off its lenders, then it exists at their mercy. If things get really bad, the lenders can take control of the business. 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. By replacing dilution, though, debt can be an extremely good tool for businesses that need capital to invest in growth 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.
View our latest analysis for Ascendis Pharma
What Is Ascendis Pharma's Debt?
You can click the graphic below for the historical numbers, but it shows that as of March 2022 Ascendis Pharma had €365.6m of debt, an increase on none, over one year. But it also has €978.7m in cash to offset that, meaning it has €613.1m net cash.
How Strong Is Ascendis Pharma's Balance Sheet?
According to the last reported balance sheet, Ascendis Pharma had liabilities of €95.4m due within 12 months, and liabilities of €609.1m due beyond 12 months. On the other hand, it had cash of €978.7m and €22.0m worth of receivables due within a year. So it can boast €296.2m more liquid assets than total liabilities.
This surplus suggests that Ascendis Pharma has a conservative balance sheet, and could probably eliminate its debt without much difficulty. Simply put, the fact that Ascendis Pharma has more cash than debt is arguably a good indication that it can manage its debt safely. 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 Ascendis Pharma'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.
Over 12 months, Ascendis Pharma reported revenue of €14m, which is a gain of 153%, although it did not report any earnings before interest and tax. So its pretty obvious shareholders are hoping for more growth!
So How Risky Is Ascendis Pharma?
We have no doubt that loss making companies are, in general, riskier than profitable ones. And the fact is that over the last twelve months Ascendis Pharma lost money at the earnings before interest and tax (EBIT) line. Indeed, in that time it burnt through €490m of cash and made a loss of €446m. While this does make the company a bit risky, it's important to remember it has net cash of €613.1m. That means it could keep spending at its current rate for more than two years. The good news for shareholders is that Ascendis Pharma has dazzling revenue growth, so there's a very good chance it can boost its free cash flow in the years to come. High growth pre-profit companies may well be risky, but they can also offer great rewards. When analysing debt levels, the balance sheet is the obvious place to start. However, not all investment risk resides within the balance sheet - far from it. To that end, you should be aware of the 3 warning signs we've spotted with Ascendis Pharma .
If you're interested in investing in businesses that can grow profits without the burden of debt, then check out this free list of growing businesses that have net cash on the balance sheet.
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This article by Simply Wall St is general in nature. We provide commentary based on historical data and analyst forecasts only using an unbiased methodology and our articles are not intended to be financial advice. 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.
