Is Aerie Pharmaceuticals (NASDAQ:AERI) A Risky Investment?

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. Importantly, Aerie Pharmaceuticals, Inc. (NASDAQ:AERI) does carry debt. But the more important question is: how much risk is that debt creating?

When Is Debt Dangerous?

Debt assists a business until the business has trouble paying it off, either with new capital or with free 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 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 step when considering a company's debt levels is to consider its cash and debt together.

View our latest analysis for Aerie Pharmaceuticals

What Is Aerie Pharmaceuticals's Net Debt?

The image below, which you can click on for greater detail, shows that at September 2020 Aerie Pharmaceuticals had debt of US$204.7m, up from US$183.6m in one year. But on the other hand it also has US$218.4m in cash, leading to a US$13.7m net cash position.

A Look At Aerie Pharmaceuticals's Liabilities

The latest balance sheet data shows that Aerie Pharmaceuticals had liabilities of US$88.6m due within a year, and liabilities of US$217.9m falling due after that. Offsetting these obligations, it had cash of US$218.4m as well as receivables valued at US$46.8m due within 12 months. So its liabilities total US$41.3m more than the combination of its cash and short-term receivables.

Given Aerie Pharmaceuticals has a market capitalization of US$596.4m, it's hard to believe these liabilities pose much threat. Having said that, it's clear that we should continue to monitor its balance sheet, lest it change for the worse. While it does have liabilities worth noting, Aerie Pharmaceuticals also has more cash than debt, so we're pretty confident it can manage its debt safely. When analysing debt levels, the balance sheet is the obvious place to start. But ultimately the future profitability of the business will decide if Aerie Pharmaceuticals 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.

Over 12 months, Aerie Pharmaceuticals reported revenue of US$83m, which is a gain of 39%, 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 Aerie Pharmaceuticals?

Statistically speaking companies that lose money are riskier than those that make money. And in the last year Aerie Pharmaceuticals had an earnings before interest and tax (EBIT) loss, truth be told. Indeed, in that time it burnt through US$127m of cash and made a loss of US$192m. However, it has net cash of US$13.7m, so it has a bit of time before it will need more capital. Aerie Pharmaceuticals's revenue growth shone bright over the last year, so it may well be in a position to turn a profit in due course. 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. But ultimately, every company can contain risks that exist outside of the balance sheet. For example, we've discovered 1 warning sign for Aerie Pharmaceuticals that you should be aware of before investing here.

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.

If you’re looking to trade Aerie Pharmaceuticals, open an account with the lowest-cost* platform trusted by professionals, Interactive Brokers. Their clients from over 200 countries and territories trade stocks, options, futures, forex, bonds and funds worldwide from a single integrated account. Promoted

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.
^*Interactive Brokers Rated Lowest Cost Broker by StockBrokers.com Annual Online Review 2020

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