Is Idorsia (VTX:IDIA) Using Debt Sensibly?

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 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 Idorsia Ltd (VTX:IDIA) does use debt in its business. But should shareholders be worried about its use of debt?

Why Does Debt Bring Risk?

Generally speaking, debt only becomes a real problem when a company can't easily pay it off, either by raising capital or with its own cash flow. Part and parcel of capitalism is the process of 'creative destruction' where failed businesses are mercilessly liquidated by their bankers. However, a more common (but still painful) scenario is that it has to raise new equity capital at a low price, thus permanently diluting shareholders. 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. When we examine debt levels, we first consider both cash and debt levels, together.

See our latest analysis for Idorsia

What Is Idorsia's Net Debt?

The chart below, which you can click on for greater detail, shows that Idorsia had CHF589.4m in debt in March 2021; about the same as the year before. However, its balance sheet shows it holds CHF868.7m in cash, so it actually has CHF279.3m net cash.

How Strong Is Idorsia's Balance Sheet?

According to the last reported balance sheet, Idorsia had liabilities of CHF101.9m due within 12 months, and liabilities of CHF707.2m due beyond 12 months. On the other hand, it had cash of CHF868.7m and CHF4.71m worth of receivables due within a year. So it actually has CHF64.4m more liquid assets than total liabilities.

This state of affairs indicates that Idorsia's balance sheet looks quite solid, as its total liabilities are just about equal to its liquid assets. So it's very unlikely that the CHF3.95b company is short on cash, but still worth keeping an eye on the balance sheet. Simply put, the fact that Idorsia 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 Idorsia 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.

In the last year Idorsia wasn't profitable at an EBIT level, but managed to grow its revenue by 230%, to CHF74m. That's virtually the hole-in-one of revenue growth!

So How Risky Is Idorsia?

By their very nature companies that are losing money are more risky than those with a long history of profitability. And we do note that Idorsia 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 CHF419m and booked a CHF429m accounting loss. With only CHF279.3m on the balance sheet, it would appear that its going to need to raise capital again soon. Importantly, Idorsia's revenue growth is hot to trot. 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. But ultimately, every company can contain risks that exist outside of the balance sheet. For instance, we've identified 2 warning signs for Idorsia that you should be aware of.

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. 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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