Is Akebia Therapeutics (NASDAQ:AKBA) Using Debt Sensibly?

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.' It's only natural to consider a company's balance sheet when you examine how risky it is, since debt is often involved when a business collapses. We note that Akebia Therapeutics, Inc. (NASDAQ:AKBA) does have debt on its balance sheet. But the more important question is: how much risk is that debt creating?

Why Does Debt Bring Risk?

Debt assists a business until the business has trouble paying it off, either with new capital or with free cash flow. Ultimately, if the company can't fulfill its legal obligations to repay debt, shareholders could walk away with nothing. However, a more usual (but still expensive) situation is where a company must dilute shareholders at a cheap share price simply to get debt under control. Of course, debt can be an important tool in businesses, particularly capital heavy businesses. When we examine debt levels, we first consider both cash and debt levels, together.

View our latest analysis for Akebia Therapeutics

What Is Akebia Therapeutics's Debt?

As you can see below, Akebia Therapeutics had US$65.9m of debt at September 2022, down from US$97.2m a year prior. However, its balance sheet shows it holds US$144.8m in cash, so it actually has US$78.8m net cash.

How Healthy Is Akebia Therapeutics' Balance Sheet?

The latest balance sheet data shows that Akebia Therapeutics had liabilities of US$188.0m due within a year, and liabilities of US$234.1m falling due after that. On the other hand, it had cash of US$144.8m and US$28.7m worth of receivables due within a year. So it has liabilities totalling US$248.6m more than its cash and near-term receivables, combined.

Given this deficit is actually higher than the company's market capitalization of US$168.6m, we think shareholders really should watch Akebia Therapeutics's debt levels, like a parent watching their child ride a bike for the first time. Hypothetically, extremely heavy dilution would be required if the company were forced to pay down its liabilities by raising capital at the current share price. Akebia Therapeutics boasts net cash, so it's fair to say it does not have a heavy debt load, even if it does have very significant liabilities, in total. There's no doubt that we learn most about debt from the balance sheet. But ultimately the future profitability of the business will decide if Akebia Therapeutics 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, Akebia Therapeutics reported revenue of US$297m, which is a gain of 41%, although it did not report any earnings before interest and tax. With any luck the company will be able to grow its way to profitability.

So How Risky Is Akebia Therapeutics?

By their very nature companies that are losing money are more risky than those with a long history of profitability. And we do note that Akebia Therapeutics had an earnings before interest and tax (EBIT) loss, over the last year. Indeed, in that time it burnt through US$81m of cash and made a loss of US$156m. Given it only has net cash of US$78.8m, the company may need to raise more capital if it doesn't reach break-even soon. Akebia Therapeutics'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. When analysing debt levels, the balance sheet is the obvious place to start. However, not all investment risk resides within the balance sheet - far from it. We've identified 3 warning signs with Akebia Therapeutics (at least 2 which are significant) , and understanding them should be part of your investment process.

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.