Despite Lacking Profits Ardelyx (NASDAQ:ARDX) Seems To Be On Top Of Its Debt

Howard Marks put it nicely when he said that, rather than worrying about share price volatility, 'The possibility of permanent loss is the risk I worry about... and every practical investor I know worries about.' 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. We can see that Ardelyx, Inc. (NASDAQ:ARDX) does use debt in its business. But is this debt a concern to shareholders?

What Risk Does Debt Bring?

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. 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. 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.

View our latest analysis for Ardelyx

What Is Ardelyx's Net Debt?

As you can see below, Ardelyx had US$27.2m of debt, at September 2023, which is about the same as the year before. You can click the chart for greater detail. But it also has US$165.1m in cash to offset that, meaning it has US$137.9m net cash.

How Strong Is Ardelyx's Balance Sheet?

Zooming in on the latest balance sheet data, we can see that Ardelyx had liabilities of US$43.5m due within 12 months and liabilities of US$54.7m due beyond that. Offsetting this, it had US$165.1m in cash and US$43.3m in receivables that were due within 12 months. So it actually has US$110.1m more liquid assets than total liabilities.

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

In the last year Ardelyx wasn't profitable at an EBIT level, but managed to grow its revenue by 1,390%, to US$134m. That's virtually the hole-in-one of revenue growth!

So How Risky Is Ardelyx?

By their very nature companies that are losing money are more risky than those with a long history of profitability. And we do note that Ardelyx 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$67m and booked a US$27m accounting loss. But the saving grace is the US$137.9m on the balance sheet. That means it could keep spending at its current rate for more than two years. Importantly, Ardelyx's revenue growth is hot to trot. While unprofitable companies can be risky, they can also grow hard and fast in those pre-profit years. 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. For example - Ardelyx has 3 warning signs we think you should be aware of.

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.