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. 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. We can see that Ardelyx, Inc. (NASDAQ:ARDX) does use debt in its business. But is this debt a concern to shareholders?
When Is Debt A Problem?
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. 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. 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.
What Is Ardelyx’s Debt?
The chart below, which you can click on for greater detail, shows that Ardelyx had US$50.2m in debt in March 2020; about the same as the year before. But on the other hand it also has US$223.2m in cash, leading to a US$173.0m net cash position.
A Look At Ardelyx’s Liabilities
We can see from the most recent balance sheet that Ardelyx had liabilities of US$23.4m falling due within a year, and liabilities of US$44.1m due beyond that. Offsetting these obligations, it had cash of US$223.2m as well as receivables valued at US$750.0k due within 12 months. So it can boast US$156.4m more liquid assets than total liabilities.
It’s good to see that Ardelyx has plenty of liquidity on its balance sheet, suggesting conservative management of liabilities. Due to its strong net asset position, it is not likely to face issues with its lenders. Simply put, the fact that Ardelyx 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 ultimately the future profitability of the business will decide if Ardelyx 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.
While it hasn’t made a profit, at least Ardelyx booked its first revenue as a publicly listed company, in the last twelve months.
So How Risky Is Ardelyx?
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 Ardelyx lost money at the earnings before interest and tax (EBIT) line. Indeed, in that time it burnt through US$85m of cash and made a loss of US$91m. But the saving grace is the US$173.0m on the balance sheet. That kitty means the company can keep spending for growth for at least two years, at current rates. The good news for shareholders is that Ardelyx 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. There’s no doubt that we learn most about debt from the balance sheet. However, not all investment risk resides within the balance sheet – far from it. Case in point: We’ve spotted 1 warning sign for Ardelyx you should be aware of.
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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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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