Is Axsome Therapeutics (NASDAQ:AXSM) Using Debt In A Risky Way?

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 might be obvious that you need to consider debt, when you think about how risky any given stock is, because too much debt can sink a company. As with many other companies Axsome Therapeutics, Inc. (NASDAQ:AXSM) makes use of debt. But the more important question is: how much risk is that debt creating?

Why Does Debt Bring Risk?

Debt and other liabilities become risky for a business when it cannot easily fulfill those obligations, either with free cash flow or by raising capital at an attractive price. 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. The first step when considering a company's debt levels is to consider its cash and debt together.

See our latest analysis for Axsome Therapeutics

What Is Axsome Therapeutics's Net Debt?

The image below, which you can click on for greater detail, shows that at September 2023 Axsome Therapeutics had debt of US$177.4m, up from US$93.9m in one year. However, it does have US$416.6m in cash offsetting this, leading to net cash of US$239.1m.

How Healthy Is Axsome Therapeutics' Balance Sheet?

According to the last reported balance sheet, Axsome Therapeutics had liabilities of US$114.7m due within 12 months, and liabilities of US$216.7m due beyond 12 months. Offsetting this, it had US$416.6m in cash and US$78.4m in receivables that were due within 12 months. So it can boast US$163.6m more liquid assets than total liabilities.

This surplus suggests that Axsome Therapeutics has a conservative balance sheet, and could probably eliminate its debt without much difficulty. 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 771%, to US$223m. That's virtually the hole-in-one of revenue growth!

So How Risky Is Axsome Therapeutics?

We have no doubt that loss making companies are, in general, riskier than profitable ones. And in the last year Axsome Therapeutics had an earnings before interest and tax (EBIT) loss, truth be told. And over the same period it saw negative free cash outflow of US$143m and booked a US$202m accounting loss. While this does make the company a bit risky, it's important to remember it has net cash of US$239.1m. 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. 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. 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.