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

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 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.

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. Part and parcel of capitalism is the process of 'creative destruction' where failed businesses are mercilessly liquidated by their bankers. 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. Having said that, the most common situation is where a company manages its debt reasonably well - and to its own advantage. The first step when considering a company's debt levels is to consider its cash and debt together.

See our latest analysis for Alkermes

What Is Alkermes's Net Debt?

The chart below, which you can click on for greater detail, shows that Alkermes had US$290.7m in debt in December 2023; about the same as the year before. However, it does have US$773.5m in cash offsetting this, leading to net cash of US$482.8m.

A Look At Alkermes' Liabilities

The latest balance sheet data shows that Alkermes had liabilities of US$520.2m due within a year, and liabilities of US$413.3m falling due after that. Offsetting these obligations, it had cash of US$773.5m as well as receivables valued at US$333.2m due within 12 months. So it can boast US$173.1m more liquid assets than total liabilities.

This short term liquidity is a sign that Alkermes could probably pay off its debt with ease, as its balance sheet is far from stretched. Succinctly put, Alkermes boasts net cash, so it's fair to say it does not have a heavy debt load!

It was also good to see that despite losing money on the EBIT line last year, Alkermes turned things around in the last 12 months, delivering and EBIT of US$420m. When analysing debt levels, the balance sheet is the obvious place to start. 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.

Finally, a business needs free cash flow to pay off debt; accounting profits just don't cut it. Alkermes may have net cash on the balance sheet, but it is still interesting to look at how well the business converts its earnings before interest and tax (EBIT) to free cash flow, because that will influence both its need for, and its capacity to manage debt. Over the last year, Alkermes recorded free cash flow worth a fulsome 84% of its EBIT, which is stronger than we'd usually expect. That positions it well to pay down debt if desirable to do so.

Summing Up

While we empathize with investors who find debt concerning, you should keep in mind that Alkermes has net cash of US$482.8m, as well as more liquid assets than liabilities. And it impressed us with free cash flow of US$353m, being 84% of its EBIT. So we don't think Alkermes's use of debt is risky. 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. Be aware that Alkermes is showing 3 warning signs in our investment analysis , and 2 of those are a bit concerning...

If, after all that, you're more interested in a fast growing company with a rock-solid balance sheet, then check out our list of net cash growth stocks without delay.

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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.