Health Check: How Prudently Does Axsome Therapeutics (NASDAQ:AXSM) Use Debt?

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.' It's only natural to consider a company's balance sheet when you examine how risky it is, since debt is often involved when a business collapses. Importantly, Axsome Therapeutics, Inc. (NASDAQ:AXSM) does carry debt. But the real question is whether this debt is making the company risky.

When Is Debt A Problem?

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. While that is not too common, we often do see indebted companies permanently diluting shareholders because lenders force them to raise capital at a distressed price. 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. The first step when considering a company's debt levels is to consider its cash and debt together.

Check out our latest analysis for Axsome Therapeutics

What Is Axsome Therapeutics's Debt?

The image below, which you can click on for greater detail, shows that at March 2024 Axsome Therapeutics had debt of US$178.7m, up from US$147.6m in one year. However, its balance sheet shows it holds US$331.4m in cash, so it actually has US$152.8m net cash.

How Healthy Is Axsome Therapeutics' Balance Sheet?

We can see from the most recent balance sheet that Axsome Therapeutics had liabilities of US$144.0m falling due within a year, and liabilities of US$257.6m due beyond that. Offsetting this, it had US$331.4m in cash and US$101.4m in receivables that were due within 12 months. So it actually has US$31.2m more liquid assets than total liabilities.

This state of affairs indicates that Axsome Therapeutics' balance sheet looks quite solid, as its total liabilities are just about equal to its liquid assets. So while it's hard to imagine that the US$3.82b company is struggling for cash, we still think it's worth monitoring its balance sheet. Succinctly put, Axsome Therapeutics boasts net cash, so it's fair to say it does not have a heavy debt load! The balance sheet is clearly the area to focus on when you are analysing debt. But ultimately the future profitability of the business will decide if Axsome Therapeutics 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.

In the last year Axsome Therapeutics wasn't profitable at an EBIT level, but managed to grow its revenue by 74%, to US$251m. With any luck the company will be able to grow its way to profitability.

So How Risky Is Axsome Therapeutics?

We have no doubt that loss making companies are, in general, riskier than profitable ones. 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$193m of cash and made a loss of US$296m. But at least it has US$152.8m on the balance sheet to spend on growth, near-term. Axsome Therapeutics's revenue growth shone bright over the last year, so it may well be in a position to turn a profit in due course. Pre-profit companies are often 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. Case in point: We've spotted 1 warning sign for Axsome Therapeutics you should be aware of.

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.

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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.

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