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 can see that Ionis Pharmaceuticals, Inc. (NASDAQ:IONS) does use debt in its business. But the more important question is: how much risk is that debt creating?
Why Does Debt Bring Risk?
Debt assists a business until the business has trouble paying it off, either with new capital or with free cash flow. Part and parcel of capitalism is the process of 'creative destruction' where failed businesses are mercilessly liquidated by their bankers. 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. Having said that, the most common situation is where a company manages its debt reasonably well - and to its own advantage. The first thing to do when considering how much debt a business uses is to look at its cash and debt together.
How Much Debt Does Ionis Pharmaceuticals Carry?
The image below, which you can click on for greater detail, shows that at March 2021 Ionis Pharmaceuticals had debt of US$918.0m, up from US$798.8m in one year. But on the other hand it also has US$1.82b in cash, leading to a US$905.2m net cash position.
How Healthy Is Ionis Pharmaceuticals' Balance Sheet?
Zooming in on the latest balance sheet data, we can see that Ionis Pharmaceuticals had liabilities of US$295.1m due within 12 months and liabilities of US$1.27b due beyond that. Offsetting these obligations, it had cash of US$1.82b as well as receivables valued at US$23.4m due within 12 months. So it actually has US$278.6m more liquid assets than total liabilities.
This short term liquidity is a sign that Ionis Pharmaceuticals could probably pay off its debt with ease, as its balance sheet is far from stretched. 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 26%, to US$708m. That makes us nervous, to say the least.
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. Indeed, in that time it burnt through US$45m of cash and made a loss of US$502m. Given it only has net cash of US$905.2m, the company may need to raise more capital if it doesn't reach break-even 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. 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. Case in point: We've spotted 2 warning signs for Ionis Pharmaceuticals you should be aware of, and 1 of them is significant.
When all is said and done, sometimes its easier to focus on companies that don't even need debt. Readers can access a list of growth stocks with zero net debt 100% free, right now.
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