Is Ascendis Pharma (NASDAQ:ASND) Using Debt In A Risky Way?

The external fund manager backed by Berkshire Hathaway's Charlie Munger, Li Lu, makes no bones about it when he says 'The biggest investment risk is not the volatility of prices, but whether you will suffer a permanent loss of capital.' When we think about how risky a company is, we always like to look at its use of debt, since debt overload can lead to ruin. Importantly, Ascendis Pharma A/S (NASDAQ:ASND) does carry debt. But the real question is whether this debt is making the company risky.

Why Does Debt Bring Risk?

Generally speaking, debt only becomes a real problem when a company can't easily pay it off, either by raising capital or with its own cash flow. If things get really bad, the lenders can take control of the business. However, a more frequent (but still costly) occurrence is where a company must issue shares at bargain-basement prices, permanently diluting shareholders, just to shore up its balance sheet. 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 Ascendis Pharma

How Much Debt Does Ascendis Pharma Carry?

The image below, which you can click on for greater detail, shows that at December 2022 Ascendis Pharma had debt of €508.4m, up from none in one year. However, it does have €735.5m in cash offsetting this, leading to net cash of €227.1m.

A Look At Ascendis Pharma's Liabilities

Zooming in on the latest balance sheet data, we can see that Ascendis Pharma had liabilities of €171.3m due within 12 months and liabilities of €655.1m due beyond that. Offsetting these obligations, it had cash of €735.5m as well as receivables valued at €25.6m due within 12 months. So it has liabilities totalling €65.3m more than its cash and near-term receivables, combined.

Having regard to Ascendis Pharma's size, it seems that its liquid assets are well balanced with its total liabilities. So it's very unlikely that the €6.11b company is short on cash, but still worth keeping an eye on the balance sheet. While it does have liabilities worth noting, Ascendis Pharma also has more cash than debt, so we're pretty confident it can manage its debt safely. When analysing debt levels, the balance sheet is the obvious place to start. But it is future earnings, more than anything, that will determine Ascendis Pharma'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 Ascendis Pharma wasn't profitable at an EBIT level, but managed to grow its revenue by 558%, to €51m. That's virtually the hole-in-one of revenue growth!

So How Risky Is Ascendis Pharma?

By their very nature companies that are losing money are more risky than those with a long history of profitability. And the fact is that over the last twelve months Ascendis Pharma lost money at the earnings before interest and tax (EBIT) line. Indeed, in that time it burnt through €493m of cash and made a loss of €583m. But the saving grace is the €227.1m on the balance sheet. That means it could keep spending at its current rate for more than two years. The good news for shareholders is that Ascendis Pharma has dazzling revenue growth, so there's a very good chance it can boost its free cash flow in the years to come. High growth pre-profit companies may well be risky, but they can also offer great rewards. The balance sheet is clearly the area to focus on when you are analysing debt. But ultimately, every company can contain risks that exist outside of the balance sheet. For instance, we've identified 1 warning sign for Ascendis Pharma that you should be aware of.

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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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.