Does ADC Therapeutics (NYSE:ADCT) Have A Healthy Balance Sheet?

Legendary fund manager Li Lu (who Charlie Munger backed) once said, 'The biggest investment risk is not the volatility of prices, but whether you will suffer a permanent loss of capital.' 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. We note that ADC Therapeutics SA (NYSE:ADCT) does have debt on its balance sheet. But the more important question is: how much risk is that debt creating?

When Is Debt A Problem?

Debt and other liabilities become risky for a business when it cannot easily fulfill those obligations, either with free cash flow or by raising capital at an attractive price. Ultimately, if the company can't fulfill its legal obligations to repay debt, shareholders could walk away with nothing. 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. By replacing dilution, though, debt can be an extremely good tool for businesses that need capital to invest in growth at high rates of return. When we think about a company's use of debt, we first look at cash and debt together.

View our latest analysis for ADC Therapeutics

What Is ADC Therapeutics's Debt?

As you can see below, at the end of September 2022, ADC Therapeutics had US$330.3m of debt, up from US$311.7m a year ago. Click the image for more detail. But on the other hand it also has US$380.9m in cash, leading to a US$50.5m net cash position.

How Strong Is ADC Therapeutics' Balance Sheet?

The latest balance sheet data shows that ADC Therapeutics had liabilities of US$87.6m due within a year, and liabilities of US$339.4m falling due after that. On the other hand, it had cash of US$380.9m and US$23.3m worth of receivables due within a year. So it has liabilities totalling US$22.9m more than its cash and near-term receivables, combined.

Since publicly traded ADC Therapeutics shares are worth a total of US$399.7m, it seems unlikely that this level of liabilities would be a major threat. However, we do think it is worth keeping an eye on its balance sheet strength, as it may change over time. Despite its noteworthy liabilities, ADC Therapeutics 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 ADC Therapeutics 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, ADC Therapeutics reported revenue of US$157m, which is a gain of 829%, although it did not report any earnings before interest and tax. That's virtually the hole-in-one of revenue growth!

So How Risky Is ADC Therapeutics?

Statistically speaking companies that lose money are riskier than those that make money. And we do note that ADC Therapeutics had an earnings before interest and tax (EBIT) loss, over the last year. Indeed, in that time it burnt through US$149m of cash and made a loss of US$166m. Given it only has net cash of US$50.5m, the company may need to raise more capital if it doesn't reach break-even soon. Importantly, ADC Therapeutics's revenue growth is hot to trot. 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 3 warning signs for ADC Therapeutics 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.