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

Warren Buffett famously said, 'Volatility is far from synonymous with risk.' 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 note that Ascendis Pharma A/S (NASDAQ:ASND) does have debt on its balance sheet. But the more important question is: how much risk is that debt creating?

What Risk Does Debt Bring?

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. 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. Having said that, the most common situation is where a company manages its debt reasonably well - and to its own advantage. The first thing to do when considering how much debt a business uses is to look at its cash and debt together.

Check out our latest analysis for Ascendis Pharma

What Is Ascendis Pharma's Debt?

The chart below, which you can click on for greater detail, shows that Ascendis Pharma had €402.7m in debt in June 2023; about the same as the year before. However, its balance sheet shows it holds €431.1m in cash, so it actually has €28.4m net cash.

How Strong Is Ascendis Pharma's Balance Sheet?

According to the last reported balance sheet, Ascendis Pharma had liabilities of €192.3m due within 12 months, and liabilities of €566.7m due beyond 12 months. Offsetting this, it had €431.1m in cash and €35.7m in receivables that were due within 12 months. So its liabilities total €292.2m more than the combination of its cash and short-term receivables.

Since publicly traded Ascendis Pharma shares are worth a total of €5.02b, it seems unlikely that this level of liabilities would be a major threat. Having said that, it's clear that we should continue to monitor its balance sheet, lest it change for the worse. Despite its noteworthy liabilities, Ascendis Pharma 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 ultimately the future profitability of the business will decide if Ascendis Pharma can strengthen its balance sheet over time. So if you're focused on the future you can check out this free report showing analyst profit forecasts.

Over 12 months, Ascendis Pharma reported revenue of €119m, which is a gain of 527%, although it did not report any earnings before interest and tax. 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 we do note that Ascendis Pharma 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 €549m and booked a €609m accounting loss. While this does make the company a bit risky, it's important to remember it has net cash of €28.4m. That kitty means the company can keep spending for growth for at least two years, at current rates. 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. While unprofitable companies can be risky, they can also grow hard and fast in those pre-profit years. When analysing debt levels, the balance sheet is the obvious place to start. However, not all investment risk resides within the balance sheet - far from it. For example - Ascendis Pharma has 1 warning sign we think you should be aware of.

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.