Is Ascendis Pharma (NASDAQ:ASND) Using Debt Sensibly?

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.' 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. As with many other companies Ascendis Pharma A/S (NASDAQ:ASND) makes use of debt. But the more important question is: how much risk is that debt creating?

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. In the worst case scenario, a company can go bankrupt if it cannot pay its creditors. 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, 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 Ascendis Pharma

What Is Ascendis Pharma's Debt?

The image below, which you can click on for greater detail, shows that at March 2023 Ascendis Pharma had debt of €399.9m, up from €365.6m in one year. But on the other hand it also has €585.7m in cash, leading to a €185.9m net cash position.

A Look At Ascendis Pharma's Liabilities

The latest balance sheet data shows that Ascendis Pharma had liabilities of €198.4m due within a year, and liabilities of €600.7m falling due after that. Offsetting this, it had €585.7m in cash and €34.6m in receivables that were due within 12 months. So its liabilities outweigh the sum of its cash and (near-term) receivables by €178.8m.

Of course, Ascendis Pharma has a market capitalization of €4.46b, so these liabilities are probably manageable. But there are sufficient liabilities that we would certainly recommend shareholders continue to monitor the balance sheet, going forward. 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 want to see what the professionals think, you might find this free report on analyst profit forecasts to be interesting.

In the last year Ascendis Pharma wasn't profitable at an EBIT level, but managed to grow its revenue by 462%, to €78m. That's virtually the hole-in-one of revenue growth!

So How Risky Is Ascendis Pharma?

We have no doubt that loss making companies are, in general, riskier than profitable ones. And the fact is that over the last twelve months Ascendis Pharma lost money at the earnings before interest and tax (EBIT) line. And over the same period it saw negative free cash outflow of €524m and booked a €569m accounting loss. But the saving grace is the €185.9m on the balance sheet. That means it could keep spending at its current rate for more than two years. Importantly, Ascendis Pharma's revenue growth is hot to trot. High growth pre-profit companies may well be risky, but they can also offer great rewards. 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. For example - Ascendis Pharma has 2 warning signs we think 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.