Is Rhythm Pharmaceuticals (NASDAQ:RYTM) Using Debt Sensibly?

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. As with many other companies Rhythm Pharmaceuticals, Inc. (NASDAQ:RYTM) makes use of debt. But should shareholders be worried about its use of debt?

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. Ultimately, if the company can't fulfill its legal obligations to repay debt, shareholders could walk away with nothing. However, a more common (but still painful) scenario is that it has to raise new equity capital at a low price, thus permanently diluting shareholders. Of course, debt can be an important tool in businesses, particularly capital heavy businesses. When we examine debt levels, we first consider both cash and debt levels, together.

Check out our latest analysis for Rhythm Pharmaceuticals

What Is Rhythm Pharmaceuticals's Net Debt?

You can click the graphic below for the historical numbers, but it shows that as of June 2024 Rhythm Pharmaceuticals had US$108.4m of debt, an increase on none, over one year. However, its balance sheet shows it holds US$319.1m in cash, so it actually has US$210.8m net cash.

How Strong Is Rhythm Pharmaceuticals' Balance Sheet?

Zooming in on the latest balance sheet data, we can see that Rhythm Pharmaceuticals had liabilities of US$54.7m due within 12 months and liabilities of US$147.6m due beyond that. Offsetting this, it had US$319.1m in cash and US$17.6m in receivables that were due within 12 months. So it actually has US$134.4m more liquid assets than total liabilities.

This short term liquidity is a sign that Rhythm Pharmaceuticals could probably pay off its debt with ease, as its balance sheet is far from stretched. Succinctly put, Rhythm 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 Rhythm 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 Rhythm Pharmaceuticals wasn't profitable at an EBIT level, but managed to grow its revenue by 133%, to US$102m. So its pretty obvious shareholders are hoping for more growth!

So How Risky Is Rhythm 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 Rhythm 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$169m and booked a US$261m accounting loss. But at least it has US$210.8m on the balance sheet to spend on growth, near-term. The good news for shareholders is that Rhythm Pharmaceuticals has dazzling revenue growth, so there's a very good chance it can boost its free cash flow in the years to come. High growth pre-profit companies may well be risky, but they can also offer great rewards. 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 1 warning sign for Rhythm Pharmaceuticals you should be aware of.

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.