Does Alkermes (NASDAQ:ALKS) Have A Healthy Balance Sheet?

Some say volatility, rather than debt, is the best way to think about risk as an investor, but Warren Buffett famously said that 'Volatility is far from synonymous with risk.' 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 can see that Alkermes plc (NASDAQ:ALKS) does use debt in its business. But the real question is whether this debt is making the company risky.

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. In the worst case scenario, a company can go bankrupt if it cannot pay its creditors. While that is not too common, we often do see indebted companies permanently diluting shareholders because lenders force them to raise capital at a distressed price. Of course, plenty of companies use debt to fund growth, without any negative consequences. When we examine debt levels, we first consider both cash and debt levels, together.

See our latest analysis for Alkermes

How Much Debt Does Alkermes Carry?

As you can see below, Alkermes had US$293.3m of debt, at December 2022, which is about the same as the year before. You can click the chart for greater detail. However, its balance sheet shows it holds US$608.5m in cash, so it actually has US$315.2m net cash.

A Look At Alkermes' Liabilities

We can see from the most recent balance sheet that Alkermes had liabilities of US$497.7m falling due within a year, and liabilities of US$422.5m due beyond that. On the other hand, it had cash of US$608.5m and US$296.9m worth of receivables due within a year. So its total liabilities are just about perfectly matched by its shorter-term, liquid assets.

This state of affairs indicates that Alkermes' balance sheet looks quite solid, as its total liabilities are just about equal to its liquid assets. So it's very unlikely that the US$4.28b company is short on cash, but still worth keeping an eye on the balance sheet. Despite its noteworthy liabilities, Alkermes boasts net cash, so it's fair to say it does not have a heavy debt load! When analysing debt levels, the balance sheet is the obvious place to start. But it is future earnings, more than anything, that will determine Alkermes'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.

Over 12 months, Alkermes made a loss at the EBIT level, and saw its revenue drop to US$1.1b, which is a fall of 5.3%. That's not what we would hope to see.

So How Risky Is Alkermes?

We have no doubt that loss making companies are, in general, riskier than profitable ones. And we do note that Alkermes had an earnings before interest and tax (EBIT) loss, over the last year. And over the same period it saw negative free cash outflow of US$17m and booked a US$158m accounting loss. But the saving grace is the US$315.2m on the balance sheet. That means it could keep spending at its current rate for more than two years. Overall, we'd say the stock is a bit risky, and we're usually very cautious until we see positive free cash flow. For riskier companies like Alkermes I always like to keep an eye on whether insiders are buying or selling. So click here if you want to find out for yourself.

Of course, if you're the type of investor who prefers buying stocks without the burden of debt, then don't hesitate to discover our exclusive list of net cash growth stocks, today.

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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.