Is Alkermes (NASDAQ:ALKS) Using Too Much Debt?

Warren Buffett famously said, 'Volatility is far from synonymous with risk.' 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 Alkermes plc (NASDAQ:ALKS) does have debt on its balance sheet. But is this debt a concern to shareholders?

Why Does Debt Bring Risk?

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 Alkermes

What Is Alkermes's Net Debt?

As you can see below, Alkermes had US$291.4m of debt, at September 2023, which is about the same as the year before. You can click the chart for greater detail. However, it does have US$889.2m in cash offsetting this, leading to net cash of US$597.8m.

A Look At Alkermes' Liabilities

According to the last reported balance sheet, Alkermes had liabilities of US$503.1m due within 12 months, and liabilities of US$420.5m due beyond 12 months. Offsetting these obligations, it had cash of US$889.2m as well as receivables valued at US$340.5m due within 12 months. So it can boast US$306.0m more liquid assets than total liabilities.

This surplus suggests that Alkermes has a conservative balance sheet, and could probably eliminate its debt without much difficulty. Succinctly put, Alkermes boasts net cash, so it's fair to say it does not have a heavy debt load!

Although Alkermes made a loss at the EBIT level, last year, it was also good to see that it generated US$6.2b in EBIT over the last twelve months. There's no doubt that we learn most about debt from the balance sheet. 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.

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 reported free cash flow worth 4.1% of its EBIT, which is really quite low. For us, cash conversion that low sparks a little paranoia about is ability to extinguish debt.

Summing Up

While it is always sensible to investigate a company's debt, in this case Alkermes has US$597.8m in net cash and a decent-looking balance sheet. So we are not troubled with Alkermes's debt use. There's no doubt that we learn most about debt from the balance sheet. However, not all investment risk resides within the balance sheet - far from it. We've identified 1 warning sign with Alkermes , and understanding them should be part of your investment process.

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.