Legendary fund manager Li Lu (who Charlie Munger backed) once said, 'The biggest investment risk is not the volatility of prices, but whether you will suffer a permanent loss of capital. 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, Akebia Therapeutics, Inc. (NASDAQ:AKBA) does carry debt. 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. In the worst case scenario, a company can go bankrupt if it cannot pay its creditors. 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. 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 step when considering a company's debt levels is to consider its cash and debt together.
What Is Akebia Therapeutics's Net Debt?
As you can see below, at the end of December 2019, Akebia Therapeutics had US$75.8m of debt, up from US$15.0m a year ago. Click the image for more detail. However, it does have US$147.7m in cash offsetting this, leading to net cash of US$71.9m.
A Look At Akebia Therapeutics's Liabilities
We can see from the most recent balance sheet that Akebia Therapeutics had liabilities of US$208.1m falling due within a year, and liabilities of US$168.3m due beyond that. On the other hand, it had cash of US$147.7m and US$38.9m worth of receivables due within a year. So its liabilities total US$189.9m more than the combination of its cash and short-term receivables.
While this might seem like a lot, it is not so bad since Akebia Therapeutics has a market capitalization of US$918.3m, and so it could probably strengthen its balance sheet by raising capital if it needed to. But we definitely want to keep our eyes open to indications that its debt is bringing too much risk. Despite its noteworthy liabilities, Akebia Therapeutics 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 it is future earnings, more than anything, that will determine Akebia Therapeutics'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 Akebia Therapeutics wasn't profitable at an EBIT level, but managed to grow its revenue by 61%, to US$335m. With any luck the company will be able to grow its way to profitability.
So How Risky Is Akebia Therapeutics?
Statistically speaking companies that lose money are riskier than those that make money. And the fact is that over the last twelve months Akebia Therapeutics lost money at the earnings before interest and tax (EBIT) line. Indeed, in that time it burnt through US$264m of cash and made a loss of US$280m. Given it only has net cash of US$71.9m, the company may need to raise more capital if it doesn't reach break-even soon. With very solid revenue growth in the last year, Akebia Therapeutics may be on a path to profitability. By investing before those profits, shareholders take on more risk in the hope of bigger rewards. There's no doubt that we learn most about debt from the balance sheet. But ultimately, every company can contain risks that exist outside of the balance sheet. To that end, you should learn about the 4 warning signs we've spotted with Akebia Therapeutics (including 2 which is are concerning) .
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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