Ironwood Pharmaceuticals (NASDAQ:IRWD) Seems To Use Debt Rather Sparingly

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.' So it might be obvious that you need to consider debt, when you think about how risky any given stock is, because too much debt can sink a company. As with many other companies Ironwood Pharmaceuticals, Inc. (NASDAQ:IRWD) makes use of debt. But is this debt a concern to shareholders?

When Is Debt Dangerous?

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 step when considering a company's debt levels is to consider its cash and debt together.

View our latest analysis for Ironwood Pharmaceuticals

How Much Debt Does Ironwood Pharmaceuticals Carry?

As you can see below, Ironwood Pharmaceuticals had US$396.7m of debt at March 2023, down from US$515.6m a year prior. But it also has US$740.3m in cash to offset that, meaning it has US$343.7m net cash.

How Healthy Is Ironwood Pharmaceuticals' Balance Sheet?

According to the last reported balance sheet, Ironwood Pharmaceuticals had liabilities of US$23.8m due within 12 months, and liabilities of US$424.6m due beyond 12 months. Offsetting this, it had US$740.3m in cash and US$115.7m in receivables that were due within 12 months. So it can boast US$407.7m more liquid assets than total liabilities.

This excess liquidity suggests that Ironwood Pharmaceuticals is taking a careful approach to debt. Given it has easily adequate short term liquidity, we don't think it will have any issues with its lenders. Simply put, the fact that Ironwood Pharmaceuticals has more cash than debt is arguably a good indication that it can manage its debt safely.

The good news is that Ironwood Pharmaceuticals has increased its EBIT by 3.4% over twelve months, which should ease any concerns about debt repayment. When analysing debt levels, the balance sheet is the obvious place to start. 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 want to see what the professionals think, you might find this free report on analyst profit forecasts to be interesting.

Finally, while the tax-man may adore accounting profits, lenders only accept cold hard cash. While Ironwood Pharmaceuticals has net cash on its balance sheet, it's still worth taking a look at its ability to convert earnings before interest and tax (EBIT) to free cash flow, to help us understand how quickly it is building (or eroding) that cash balance. Over the last three years, Ironwood Pharmaceuticals actually produced more free cash flow than EBIT. There's nothing better than incoming cash when it comes to staying in your lenders' good graces.

Summing Up

While we empathize with investors who find debt concerning, you should keep in mind that Ironwood Pharmaceuticals has net cash of US$343.7m, as well as more liquid assets than liabilities. And it impressed us with free cash flow of US$290m, being 108% of its EBIT. So is Ironwood Pharmaceuticals's debt a risk? It doesn't seem so to us. When analysing debt levels, the balance sheet is the obvious place to start. However, not all investment risk resides within the balance sheet - far from it. For instance, we've identified 2 warning signs for Ironwood Pharmaceuticals that you should be aware of.

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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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.