Alkermes (NASDAQ:ALKS) Has Debt But No Earnings; Should You Worry?

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 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, Alkermes plc (NASDAQ:ALKS) does carry debt. 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. In the worst case scenario, a company can go bankrupt if it cannot pay its creditors. 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, 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.

View our latest analysis for Alkermes

What Is Alkermes's Net Debt?

The image below, which you can click on for greater detail, shows that at September 2021 Alkermes had debt of US$296.4m, up from US$275.5m in one year. However, it does have US$560.3m in cash offsetting this, leading to net cash of US$263.9m.

How Healthy Is Alkermes' Balance Sheet?

Zooming in on the latest balance sheet data, we can see that Alkermes had liabilities of US$453.0m due within 12 months and liabilities of US$446.3m due beyond that. Offsetting this, it had US$560.3m in cash and US$292.7m in receivables that were due within 12 months. So its liabilities total US$46.3m more than the combination of its cash and short-term receivables.

Having regard to Alkermes' size, it seems that its liquid assets are well balanced with its total liabilities. So it's very unlikely that the US$3.83b company is short on cash, but still worth keeping an eye on the balance sheet. While it does have liabilities worth noting, Alkermes also has more cash than debt, so we're pretty confident 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 Alkermes 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 Alkermes had a loss before interest and tax, and actually shrunk its revenue by 3.6%, to US$1.1b. That's not what we would hope to see.

So How Risky Is Alkermes?

Although Alkermes had an earnings before interest and tax (EBIT) loss over the last twelve months, it generated positive free cash flow of US$112m. So taking that on face value, and considering the net cash situation, we don't think that the stock is too risky in the near term. Until we see some positive EBIT, we're a bit cautious of the stock, not least because of the rather modest revenue growth. 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. These risks can be hard to spot. Every company has them, and we've spotted 1 warning sign for Alkermes you should know about.

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.