Is Ionis Pharmaceuticals (NASDAQ:IONS) Using Debt Sensibly?

The external fund manager backed by Berkshire Hathaway's Charlie Munger, Li Lu, makes no bones about it when he says 'The biggest investment risk is not the volatility of prices, but whether you will suffer a permanent loss of capital.' 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 is this debt a concern to shareholders?

What Risk Does Debt Bring?

Debt assists a business until the business has trouble paying it off, either with new capital or with free cash flow. If things get really bad, the lenders can take control of the business. 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, the upside of debt is that it often represents cheap capital, especially when it replaces dilution in a company with the ability to reinvest 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 Ionis Pharmaceuticals

What Is Ionis Pharmaceuticals's Debt?

You can click the graphic below for the historical numbers, but it shows that as of June 2021 Ionis Pharmaceuticals had US$1.29b of debt, an increase on US$789.2m, over one year. But it also has US$2.06b in cash to offset that, meaning it has US$773.6m net cash.

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$293.8m due within 12 months and liabilities of US$1.62b due beyond that. Offsetting these obligations, it had cash of US$2.06b as well as receivables valued at US$24.0m due within 12 months. So it actually has US$172.1m 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. Succinctly put, Ionis Pharmaceuticals boasts net cash, so it's fair to say it does not have a heavy debt load! When analysing debt levels, the balance sheet is the obvious place to start. But ultimately the future profitability of the business will decide if Ionis Pharmaceuticals 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.

Over 12 months, Ionis Pharmaceuticals made a loss at the EBIT level, and saw its revenue drop to US$688m, which is a fall of 27%. That makes us nervous, to say the least.

So How Risky Is Ionis Pharmaceuticals?

By their very nature companies that are losing money are more risky than those with a long history of profitability. And the fact is that over the last twelve months Ionis Pharmaceuticals lost money at the earnings before interest and tax (EBIT) line. And over the same period it saw negative free cash outflow of US$59m and booked a US$557m accounting loss. With only US$773.6m on the balance sheet, it would appear that its going to need to raise capital again soon. Overall, its balance sheet doesn't seem overly risky, at the moment, but we're always cautious until we see the positive free cash flow. The balance sheet is clearly the area to focus on when you are analysing debt. However, not all investment risk resides within the balance sheet - far from it. For instance, we've identified 1 warning sign for Ionis Pharmaceuticals that you should be aware of.

If, after all that, you're more interested in a fast growing company with a rock-solid balance sheet, then check out our list of net cash growth stocks without delay.

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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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