Is Albireo Pharma (NASDAQ:ALBO) Using Debt Sensibly?

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.' When we think about how risky a company is, we always like to look at its use of debt, since debt overload can lead to ruin. We can see that Albireo Pharma, Inc. (NASDAQ:ALBO) does use debt in its business. But the real question is whether this debt is making the company risky.

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. If things get really bad, the lenders can take control of the business. 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. 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 Albireo Pharma

What Is Albireo Pharma's Net Debt?

You can click the graphic below for the historical numbers, but it shows that as of September 2021 Albireo Pharma had US$9.93m of debt, an increase on US$9.51m, over one year. But it also has US$262.6m in cash to offset that, meaning it has US$252.7m net cash.

How Healthy Is Albireo Pharma's Balance Sheet?

The latest balance sheet data shows that Albireo Pharma had liabilities of US$33.1m due within a year, and liabilities of US$81.6m falling due after that. Offsetting this, it had US$262.6m in cash and US$1.31m in receivables that were due within 12 months. So it actually has US$149.2m more liquid assets than total liabilities.

This excess liquidity suggests that Albireo Pharma 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 Albireo Pharma 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 Albireo Pharma 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.

In the last year Albireo Pharma had a loss before interest and tax, and actually shrunk its revenue by 10%, to US$11m. We would much prefer see growth.

So How Risky Is Albireo Pharma?

Statistically speaking companies that lose money are riskier than those that make money. And the fact is that over the last twelve months Albireo Pharma lost money at the earnings before interest and tax (EBIT) line. Indeed, in that time it burnt through US$122m of cash and made a loss of US$48m. However, it has net cash of US$252.7m, so it has a bit of time before it will need more capital. 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. For example - Albireo Pharma has 1 warning sign we think you should be aware of.

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.

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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.