Health Check: How Prudently Does Alkermes (NASDAQ:ALKS) 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.' 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 is a tool to help businesses grow, but if a business is incapable of paying off its lenders, then it exists at their mercy. 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, debt can be an important tool in businesses, particularly capital heavy businesses. When we think about a company's use of debt, we first look at cash and debt together.

Check out 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$294.5m in debt in June 2022; about the same as the year before. However, it does have US$581.0m in cash offsetting this, leading to net cash of US$286.4m.

A Look At Alkermes' Liabilities

We can see from the most recent balance sheet that Alkermes had liabilities of US$438.5m falling due within a year, and liabilities of US$436.6m due beyond that. On the other hand, it had cash of US$581.0m and US$262.3m worth of receivables due within a year. So its liabilities outweigh the sum of its cash and (near-term) receivables by US$31.8m.

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$4.03b 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're focused on the future you can check out this free report showing analyst profit forecasts.

In the last year Alkermes wasn't profitable at an EBIT level, but managed to grow its revenue by 6.7%, to US$1.2b. We usually like to see faster growth from unprofitable companies, but each to their own.

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$102m. So although it is loss-making, it doesn't seem to have too much near-term balance sheet risk, keeping in mind the net cash. With revenue growth uninspiring, we'd really need to see some positive EBIT before mustering much enthusiasm for this business. When we look at a riskier company, we like to check how their profits (or losses) are trending over time. Today, we're providing readers this interactive graph showing how Alkermes's profit, revenue, and operating cashflow have changed over the last few years.

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.

Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team (at) simplywallst.com.

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.