Is Atai Life Sciences (NASDAQ:ATAI) Using Debt In A Risky Way?

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. Importantly, Atai Life Sciences N.V. (NASDAQ:ATAI) does carry debt. But is this debt a concern to shareholders?

Why Does Debt Bring Risk?

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. 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 Atai Life Sciences

What Is Atai Life Sciences's Debt?

The image below, which you can click on for greater detail, shows that at March 2024 Atai Life Sciences had debt of US$22.0m, up from US$17.5m in one year. However, its balance sheet shows it holds US$106.2m in cash, so it actually has US$84.3m net cash.

How Strong Is Atai Life Sciences' Balance Sheet?

We can see from the most recent balance sheet that Atai Life Sciences had liabilities of US$15.0m falling due within a year, and liabilities of US$30.9m due beyond that. Offsetting this, it had US$106.2m in cash and US$2.47m in receivables that were due within 12 months. So it actually has US$62.8m more liquid assets than total liabilities.

It's good to see that Atai Life Sciences has plenty of liquidity on its balance sheet, suggesting conservative management of liabilities. Due to its strong net asset position, it is not likely to face issues with its lenders. Simply put, the fact that Atai Life Sciences has more cash than debt is arguably a good indication that it can manage its debt safely. When analysing debt levels, the balance sheet is the obvious place to start. But ultimately the future profitability of the business will decide if Atai Life Sciences 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.

Given it has no significant operating revenue at the moment, shareholders will be hoping Atai Life Sciences can make progress and gain better traction for the business, before it runs low on cash.

So How Risky Is Atai Life Sciences?

Statistically speaking companies that lose money are riskier than those that make money. And the fact is that over the last twelve months Atai Life Sciences lost money at the earnings before interest and tax (EBIT) line. Indeed, in that time it burnt through US$86m of cash and made a loss of US$34m. But at least it has US$84.3m on the balance sheet to spend on growth, near-term. Overall, its balance sheet doesn't seem overly risky, at the moment, but we're always cautious until we see the positive free cash flow. 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. These risks can be hard to spot. Every company has them, and we've spotted 4 warning signs for Atai Life Sciences (of which 2 make us uncomfortable!) you should know about.

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.

Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team (at) simplywallst.com.

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.

Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team@simplywallst.com