Rock star Growth Puts Albireo Pharma (NASDAQ:ALBO) In A Position To 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 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. We note that Albireo Pharma, Inc. (NASDAQ:ALBO) does have debt on its balance sheet. But is this debt a concern to shareholders?

When Is Debt A Problem?

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. 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, plenty of companies use debt to fund growth, without any negative consequences. The first step when considering a company's debt levels is to consider its cash and debt together.

View our latest analysis for Albireo Pharma

How Much Debt Does Albireo Pharma Carry?

The chart below, which you can click on for greater detail, shows that Albireo Pharma had US$10.2m in debt in June 2022; about the same as the year before. But it also has US$181.0m in cash to offset that, meaning it has US$170.8m net cash.

How Healthy Is Albireo Pharma's Balance Sheet?

Zooming in on the latest balance sheet data, we can see that Albireo Pharma had liabilities of US$43.6m due within 12 months and liabilities of US$71.7m due beyond that. On the other hand, it had cash of US$181.0m and US$1.85m worth of receivables due within a year. So it actually has US$67.5m more liquid assets than total liabilities.

This excess liquidity suggests that Albireo Pharma is taking a careful approach to debt. Because it has plenty of assets, it is unlikely to have trouble 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. When analysing debt levels, the balance sheet is the obvious place to start. But it is future earnings, more than anything, that will determine Albireo Pharma's ability to maintain a healthy balance sheet going forward. So if you want to see what the professionals think, you might find this free report on analyst profit forecasts to be interesting.

In the last year Albireo Pharma wasn't profitable at an EBIT level, but managed to grow its revenue by 454%, to US$51m. That's virtually the hole-in-one of revenue growth!

So How Risky Is Albireo Pharma?

We have no doubt that loss making companies are, in general, riskier than profitable ones. And in the last year Albireo Pharma had an earnings before interest and tax (EBIT) loss, truth be told. And over the same period it saw negative free cash outflow of US$114m and booked a US$36m accounting loss. But at least it has US$170.8m on the balance sheet to spend on growth, near-term. The good news for shareholders is that Albireo Pharma has dazzling revenue growth, so there's a very good chance it can boost its free cash flow in the years to come. High growth pre-profit companies may well be risky, but they can also offer great rewards. The balance sheet is clearly the area to focus on when you are analysing debt. However, not all investment risk resides within the balance sheet - far from it. We've identified 3 warning signs with Albireo Pharma , 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.