Ironwood Pharmaceuticals (NASDAQ:IRWD) Could Easily Take On More Debt

Some say volatility, rather than debt, is the best way to think about risk as an investor, but Warren Buffett famously said that 'Volatility is far from synonymous with risk.' 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. Importantly, Ironwood Pharmaceuticals, Inc. (NASDAQ:IRWD) does carry debt. But is this debt a concern to shareholders?

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. Part and parcel of capitalism is the process of 'creative destruction' where failed businesses are mercilessly liquidated by their bankers. However, a more frequent (but still costly) occurrence is where a company must issue shares at bargain-basement prices, permanently diluting shareholders, just to shore up its balance sheet. Of course, plenty of companies use debt to fund growth, without any negative consequences. When we think about a company's use of debt, we first look at cash and debt together.

See our latest analysis for Ironwood Pharmaceuticals

What Is Ironwood Pharmaceuticals's Net Debt?

As you can see below, Ironwood Pharmaceuticals had US$396.3m of debt at December 2022, down from US$454.2m a year prior. But it also has US$656.2m in cash to offset that, meaning it has US$260.0m net cash.

How Healthy Is Ironwood Pharmaceuticals' Balance Sheet?

The latest balance sheet data shows that Ironwood Pharmaceuticals had liabilities of US$25.5m due within a year, and liabilities of US$422.6m falling due after that. Offsetting these obligations, it had cash of US$656.2m as well as receivables valued at US$115.5m due within 12 months. So it actually has US$323.5m more liquid assets than total liabilities.

It's good to see that Ironwood Pharmaceuticals has plenty of liquidity on its balance sheet, suggesting conservative management of liabilities. Given it has easily adequate short term liquidity, we don't think it will have any issues with its lenders. Succinctly put, Ironwood Pharmaceuticals boasts net cash, so it's fair to say it does not have a heavy debt load!

The good news is that Ironwood Pharmaceuticals has increased its EBIT by 7.8% over twelve months, which should ease any concerns about debt repayment. There's no doubt that we learn most about debt from the balance sheet. But it is future earnings, more than anything, that will determine Ironwood Pharmaceuticals's ability to maintain a healthy balance sheet going forward. So if you're focused on the future you can check out this free report showing analyst profit forecasts.

Finally, a company can only pay off debt with cold hard cash, not accounting profits. Ironwood Pharmaceuticals may have net cash on the balance sheet, but it is still interesting to look at how well the business converts its earnings before interest and tax (EBIT) to free cash flow, because that will influence both its need for, and its capacity to manage debt. Happily for any shareholders, Ironwood Pharmaceuticals actually produced more free cash flow than EBIT over the last three years. That sort of strong cash generation warms our hearts like a puppy in a bumblebee suit.

Summing Up

While it is always sensible to investigate a company's debt, in this case Ironwood Pharmaceuticals has US$260.0m in net cash and a decent-looking balance sheet. And it impressed us with free cash flow of US$274m, being 110% of its EBIT. So we don't think Ironwood Pharmaceuticals's use of debt is risky. There's no doubt that we learn most about debt from the balance sheet. However, not all investment risk resides within the balance sheet - far from it. For example, we've discovered 2 warning signs for Ironwood Pharmaceuticals that you should be aware of before investing here.

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.