Is Axsome Therapeutics (NASDAQ:AXSM) Weighed On By Its Debt Load?

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.' 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. We can see that Axsome Therapeutics, Inc. (NASDAQ:AXSM) does use debt in its business. But is this debt a concern to shareholders?

When Is Debt A Problem?

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. Part and parcel of capitalism is the process of 'creative destruction' where failed businesses are mercilessly liquidated by their bankers. However, a more usual (but still expensive) situation is where a company must dilute shareholders at a cheap share price simply to get debt under control. Of course, plenty of companies use debt to fund growth, without any negative consequences. The first thing to do when considering how much debt a business uses is to look at its cash and debt together.

Check out the opportunities and risks within the US Pharmaceuticals industry.

How Much Debt Does Axsome Therapeutics Carry?

The image below, which you can click on for greater detail, shows that at September 2022 Axsome Therapeutics had debt of US$93.9m, up from US$49.2m in one year. However, it does have US$227.5m in cash offsetting this, leading to net cash of US$133.6m.

A Look At Axsome Therapeutics' Liabilities

We can see from the most recent balance sheet that Axsome Therapeutics had liabilities of US$60.3m falling due within a year, and liabilities of US$121.3m due beyond that. Offsetting these obligations, it had cash of US$227.5m as well as receivables valued at US$20.3m due within 12 months. So it can boast US$66.2m 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. Simply put, the fact that Axsome Therapeutics 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 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.

While it hasn't made a profit, at least Axsome Therapeutics booked its first revenue as a publicly listed company, in the last twelve months.

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. Indeed, in that time it burnt through US$118m of cash and made a loss of US$160m. But the saving grace is the US$133.6m on the balance sheet. That means it could keep spending at its current rate for more than two years. Even though its balance sheet seems sufficiently liquid, debt always makes us a little nervous if a company doesn't produce free cash flow regularly. There's no doubt that we learn most about debt from the balance sheet. But ultimately, every company can contain risks that exist outside of the balance sheet. For example Axsome Therapeutics has 2 warning signs (and 1 which is a bit unpleasant) we think you should know about.

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.