Ionis Pharmaceuticals (NASDAQ:IONS) Has Debt But No Earnings; Should You Worry?

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.' When we think about how risky a company is, we always like to look at its use of debt, since debt overload can lead to ruin. We note that Ionis Pharmaceuticals, Inc. (NASDAQ:IONS) does have debt on its balance sheet. But the real question is whether this debt is making the company risky.

When Is Debt A Problem?

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. In the worst case scenario, a company can go bankrupt if it cannot pay its creditors. 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. 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 think about a company's use of debt, we first look at cash and debt together.

View our latest analysis for Ionis Pharmaceuticals

How Much Debt Does Ionis Pharmaceuticals Carry?

The image below, which you can click on for greater detail, shows that at September 2021 Ionis Pharmaceuticals had debt of US$1.28b, up from US$798.9m in one year. However, its balance sheet shows it holds US$2.00b in cash, so it actually has US$718.3m net cash.

How Strong Is Ionis Pharmaceuticals' Balance Sheet?

We can see from the most recent balance sheet that Ionis Pharmaceuticals had liabilities of US$279.8m falling due within a year, and liabilities of US$1.60b due beyond that. Offsetting these obligations, it had cash of US$2.00b as well as receivables valued at US$9.07m due within 12 months. So it actually has US$125.0m more liquid assets than total liabilities.

This surplus suggests that Ionis Pharmaceuticals has a conservative balance sheet, and could probably eliminate its debt without much difficulty. Simply put, the fact that Ionis Pharmaceuticals has more cash than debt is arguably a good indication that it can manage its debt safely. There's no doubt that we learn most about debt from the balance sheet. But ultimately the future profitability of the business will decide if Ionis Pharmaceuticals can strengthen its balance sheet over time. 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 Ionis Pharmaceuticals had a loss before interest and tax, and actually shrunk its revenue by 29%, to US$661m. To be frank that doesn't bode well.

So How Risky Is Ionis Pharmaceuticals?

We have no doubt that loss making companies are, in general, riskier than profitable ones. And in the last year Ionis Pharmaceuticals 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$96m and booked a US$615m accounting loss. With only US$718.3m on the balance sheet, it would appear that its going to need to raise capital again soon. 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. When analysing debt levels, the balance sheet is the obvious place to start. 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 1 warning sign for Ionis Pharmaceuticals 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.