Does Axsome Therapeutics (NASDAQ:AXSM) Have A Healthy Balance Sheet?

Howard Marks put it nicely when he said that, rather than worrying about share price volatility, 'The possibility of permanent loss is the risk I worry about... and every practical investor I know worries about.' 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, Axsome Therapeutics, Inc. (NASDAQ:AXSM) does carry debt. But should shareholders be worried about its use of debt?

Why Does Debt Bring Risk?

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 common (but still painful) scenario is that it has to raise new equity capital at a low price, thus permanently diluting shareholders. By replacing dilution, though, debt can be an extremely good tool for businesses that need capital to invest in growth at high rates of return. When we examine debt levels, we first consider both cash and debt levels, together.

See our latest analysis for Axsome Therapeutics

What Is Axsome Therapeutics's Net Debt?

You can click the graphic below for the historical numbers, but it shows that as of December 2023 Axsome Therapeutics had US$178.1m of debt, an increase on US$94.3m, over one year. But it also has US$386.2m in cash to offset that, meaning it has US$208.1m net cash.

How Strong Is Axsome Therapeutics' Balance Sheet?

Zooming in on the latest balance sheet data, we can see that Axsome Therapeutics had liabilities of US$138.9m due within 12 months and liabilities of US$258.4m due beyond that. Offsetting these obligations, it had cash of US$386.2m as well as receivables valued at US$94.8m due within 12 months. So it actually has US$83.8m more liquid assets than total liabilities.

This short term liquidity is a sign that Axsome Therapeutics could probably pay off its debt with ease, as its balance sheet is far from stretched. Simply put, the fact that Axsome Therapeutics has more cash than debt is arguably a good indication that it can manage its debt safely. The balance sheet is clearly the area to focus on when you are analysing debt. But it is future earnings, more than anything, that will determine Axsome Therapeutics'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 Axsome Therapeutics wasn't profitable at an EBIT level, but managed to grow its revenue by 441%, to US$271m. That's virtually the hole-in-one of revenue growth!

So How Risky Is Axsome Therapeutics?

Statistically speaking companies that lose money are riskier than those that make money. And we do note that Axsome Therapeutics had an earnings before interest and tax (EBIT) loss, over the last year. Indeed, in that time it burnt through US$146m of cash and made a loss of US$239m. But the saving grace is the US$208.1m on the balance sheet. That means it could keep spending at its current rate for more than two years. Importantly, Axsome Therapeutics's revenue growth is hot to trot. While unprofitable companies can be risky, they can also grow hard and fast in those pre-profit years. 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. Be aware that Axsome Therapeutics is showing 1 warning sign in our investment analysis , you should know about...

At the end of the day, it's often better to focus on companies that are free from net debt. You can access our special list of such companies (all with a track record of profit growth). It's free.

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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.