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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. Importantly, Ardelyx, Inc. (NASDAQ:ARDX) does carry debt. 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. If things get really bad, the lenders can take control of the business. However, a more common (but still painful) scenario is that it has to raise new equity capital at a low price, thus permanently diluting shareholders. Of course, plenty of companies use debt to fund growth, without any negative consequences. The first thing to do when considering how much debt a business uses is to look at its cash and debt together.
What Is Ardelyx’s Net Debt?
As you can see below, at the end of March 2019, Ardelyx had US$49.4m of debt, up from none a year ago. Click the image for more detail. But it also has US$151.6m in cash to offset that, meaning it has US$102.2m net cash.
A Look At Ardelyx’s Liabilities
The latest balance sheet data shows that Ardelyx had liabilities of US$20.8m due within a year, and liabilities of US$53.5m falling due after that. Offsetting these obligations, it had cash of US$151.6m as well as receivables valued at US$7.0k due within 12 months. So it can boast US$77.3m more liquid assets than total liabilities.
This luscious liquidity implies that Ardelyx’s balance sheet is sturdy like a giant sequoia tree. On this view, it seems its balance sheet is as strong as a black-belt karate master. Ardelyx 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 Ardelyx’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.
Given its lack of meaningful operating revenue, Ardelyx shareholders no doubt hope it can fund itself until it has a profitable product.
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 negative earnings before interest and tax (EBIT), over the last year. Indeed, in that time it burnt through US$81m of cash and made a loss of US$100m. However, it has net cash of US$152m, so it has a bit of time before it will need more capital. Even though its balance sheet seems sufficiently liquid, debt always makes us a little nervous if a company doesn’t produce free cash flow regularly. For riskier companies like Ardelyx 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.
When all is said and done, sometimes its easier to focus on companies that don’t even need debt. Readers can access a list of growth stocks with zero net debt 100% free, right now.
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If you spot an error that warrants correction, please contact the editor at firstname.lastname@example.org. This article by Simply Wall St is general in nature. It does not constitute a recommendation to buy or sell any stock, and does not take account of your objectives, or your financial situation. Simply Wall St has no position in the stocks mentioned. Thank you for reading.