Is Achieve Life Sciences (NASDAQ:ACHV) A Risky Investment?

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.' When we think about how risky a company is, we always like to look at its use of debt, since debt overload can lead to ruin. We note that Achieve Life Sciences, Inc. (NASDAQ:ACHV) does have debt on its balance sheet. But the real question is whether this debt is making the company risky.

When Is Debt Dangerous?

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. Ultimately, if the company can't fulfill its legal obligations to repay debt, shareholders could walk away with nothing. However, a more frequent (but still costly) occurrence is where a company must issue shares at bargain-basement prices, permanently diluting shareholders, just to shore up its balance sheet. Of course, debt can be an important tool in businesses, particularly capital heavy businesses. The first thing to do when considering how much debt a business uses is to look at its cash and debt together.

See our latest analysis for Achieve Life Sciences

What Is Achieve Life Sciences's Net Debt?

You can click the graphic below for the historical numbers, but it shows that as of December 2022 Achieve Life Sciences had US$16.1m of debt, an increase on US$14.9m, over one year. However, its balance sheet shows it holds US$24.8m in cash, so it actually has US$8.70m net cash.

A Look At Achieve Life Sciences' Liabilities

According to the last reported balance sheet, Achieve Life Sciences had liabilities of US$21.6m due within 12 months, and liabilities of US$69.0k due beyond 12 months. On the other hand, it had cash of US$24.8m and US$105.0k worth of receivables due within a year. So it actually has US$3.21m more liquid assets than total liabilities.

This surplus suggests that Achieve Life Sciences has a conservative balance sheet, and could probably eliminate its debt without much difficulty. Succinctly put, Achieve Life Sciences 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 ultimately the future profitability of the business will decide if Achieve Life Sciences 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.

Given its lack of meaningful operating revenue, Achieve Life Sciences shareholders no doubt hope it can fund itself until it has a profitable product.

So How Risky Is Achieve Life Sciences?

Statistically speaking companies that lose money are riskier than those that make money. And the fact is that over the last twelve months Achieve Life Sciences lost money at the earnings before interest and tax (EBIT) line. Indeed, in that time it burnt through US$38m of cash and made a loss of US$42m. With only US$8.70m on the balance sheet, it would appear that its going to need to raise capital again soon. 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. 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 6 warning signs for Achieve Life Sciences you should be aware of, and 3 of them are a bit concerning.

When all is said and done, sometimes its easier to focus on companies that don't even need debt. Readers can access a list of growth stocks with zero net debt 100% free, right now.

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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.