Is Achieve Life Sciences (NASDAQ:ACHV) Weighed On By Its Debt Load?

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 might be obvious that you need to consider debt, when you think about how risky any given stock is, because too much debt can sink a company. 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 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. 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, 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 think about a company's use of debt, we first look at cash and debt together.

Check out our latest analysis for Achieve Life Sciences

What Is Achieve Life Sciences's Net Debt?

As you can see below, at the end of December 2021, Achieve Life Sciences had US$14.9m of debt, up from none a year ago. Click the image for more detail. However, it does have US$43.0m in cash offsetting this, leading to net cash of US$28.1m.

How Strong Is Achieve Life Sciences' Balance Sheet?

According to the last reported balance sheet, Achieve Life Sciences had liabilities of US$4.55m due within 12 months, and liabilities of US$14.9m due beyond 12 months. Offsetting this, it had US$43.0m in cash and US$153.0k in receivables that were due within 12 months. So it actually has US$23.7m more liquid assets than total liabilities.

This luscious liquidity implies that Achieve Life Sciences' balance sheet is sturdy like a giant sequoia tree. On this view, lenders should feel as safe as the beloved of a black-belt karate master. Simply put, the fact that Achieve Life Sciences 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 Achieve Life Sciences can strengthen its balance sheet over time. So if you want to see what the professionals think, you might find this free report on analyst profit forecasts to be interesting.

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. And over the same period it saw negative free cash outflow of US$29m and booked a US$33m accounting loss. Given it only has net cash of US$28.1m, the company may need to raise more capital if it doesn't reach break-even 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. But ultimately, every company can contain risks that exist outside of the balance sheet. We've identified 4 warning signs with Achieve Life Sciences (at least 2 which don't sit too well with us) , and understanding them should be part of your investment process.

If, after all that, you're more interested in a fast growing company with a rock-solid balance sheet, then check out our list of net cash growth stocks without delay.

Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team (at) simplywallst.com.

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.