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 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. Importantly, Aclaris Therapeutics, Inc. (NASDAQ:ACRS) does carry debt. But the more important question is: how much risk is that debt creating?
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. In the worst case scenario, a company can go bankrupt if it cannot pay its creditors. 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. 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 Aclaris Therapeutics's Debt?
The image below, which you can click on for greater detail, shows that Aclaris Therapeutics had debt of US$10.6m at the end of September 2020, a reduction from US$29.9m over a year. But on the other hand it also has US$53.5m in cash, leading to a US$42.9m net cash position.
How Strong Is Aclaris Therapeutics's Balance Sheet?
Zooming in on the latest balance sheet data, we can see that Aclaris Therapeutics had liabilities of US$12.8m due within 12 months and liabilities of US$18.4m due beyond that. Offsetting these obligations, it had cash of US$53.5m as well as receivables valued at US$887.0k due within 12 months. So it can boast US$23.2m more liquid assets than total liabilities.
This excess liquidity suggests that Aclaris Therapeutics is taking a careful approach to debt. Given it has easily adequate short term liquidity, we don't think it will have any issues with its lenders. Simply put, the fact that Aclaris Therapeutics has more cash than debt is arguably a good indication that it can manage its debt safely. There's no doubt that we learn most about debt from the balance sheet. But it is future earnings, more than anything, that will determine Aclaris Therapeutics's ability to maintain a healthy balance sheet going forward. So if you're focused on the future you can check out this free report showing analyst profit forecasts.
Over 12 months, Aclaris Therapeutics reported revenue of US$6.0m, which is a gain of 22%, although it did not report any earnings before interest and tax. Shareholders probably have their fingers crossed that it can grow its way to profits.
So How Risky Is Aclaris Therapeutics?
We have no doubt that loss making companies are, in general, riskier than profitable ones. And we do note that Aclaris Therapeutics had an earnings before interest and tax (EBIT) loss, over the last year. Indeed, in that time it burnt through US$51m of cash and made a loss of US$57m. But at least it has US$42.9m on the balance sheet to spend on growth, near-term. With very solid revenue growth in the last year, Aclaris Therapeutics may be on a path to profitability. Pre-profit companies are often 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 5 warning signs for Aclaris Therapeutics you should be aware of, and 2 of them can't be ignored.
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. 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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