Health Check: How Prudently Does Acorda Therapeutics (NASDAQ:ACOR) Use Debt?

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, Acorda Therapeutics, Inc. (NASDAQ:ACOR) does carry debt. But the real question is whether this debt is making the company risky.

Why Does Debt Bring Risk?

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. In the worst case scenario, a company can go bankrupt if it cannot pay its creditors. 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. Having said that, the most common situation is where a company manages its debt reasonably well - and to its own advantage. The first thing to do when considering how much debt a business uses is to look at its cash and debt together.

View our latest analysis for Acorda Therapeutics

What Is Acorda Therapeutics's Debt?

The chart below, which you can click on for greater detail, shows that Acorda Therapeutics had US$181.0m in debt in September 2023; about the same as the year before. However, it does have US$32.5m in cash offsetting this, leading to net debt of about US$148.6m.

How Healthy Is Acorda Therapeutics' Balance Sheet?

The latest balance sheet data shows that Acorda Therapeutics had liabilities of US$46.3m due within a year, and liabilities of US$261.1m falling due after that. Offsetting this, it had US$32.5m in cash and US$12.0m in receivables that were due within 12 months. So its liabilities total US$262.9m more than the combination of its cash and short-term receivables.

This deficit casts a shadow over the US$17.3m company, like a colossus towering over mere mortals. So we definitely think shareholders need to watch this one closely. After all, Acorda Therapeutics would likely require a major re-capitalisation if it had to pay its creditors today. There's no doubt that we learn most about debt from the balance sheet. But you can't view debt in total isolation; since Acorda Therapeutics will need earnings to service that debt. So when considering debt, it's definitely worth looking at the earnings trend. Click here for an interactive snapshot.

Over 12 months, Acorda Therapeutics made a loss at the EBIT level, and saw its revenue drop to US$111m, which is a fall of 10%. That's not what we would hope to see.

Caveat Emptor

Not only did Acorda Therapeutics's revenue slip over the last twelve months, but it also produced negative earnings before interest and tax (EBIT). Indeed, it lost a very considerable US$20m at the EBIT level. Reflecting on this and the significant total liabilities, it's hard to know what to say about the stock because of our intense dis-affinity for it. Sure, the company might have a nice story about how they are going on to a brighter future. But the reality is that it is low on liquid assets relative to liabilities, and it burned through US$2.0m in the last year. So is this a high risk stock? We think so, and we'd avoid it. 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. These risks can be hard to spot. Every company has them, and we've spotted 3 warning signs for Acorda Therapeutics you should know about.

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. 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.