David Iben put it well when he said: “Volatility is not a risk that is close to our hearts. What matters to us is to avoid the permanent loss of capital. ‘ So it can be obvious that you need to consider debt, when you think about how risky a given stock is because too much debt can sink a business. We notice that Alkermes plc (NASDAQ: ALKS) has debt on its balance sheet. But the most important question is: what risk does this debt create?
Why Does Debt Bring Risk?
Debt helps a business until the business struggles to repay it, either with new capital or with free cash flow. Ultimately, if the company cannot meet its legal debt repayment obligations, shareholders could walk away with nothing. However, a more common (but still costly) situation is where a company has to dilute its shareholders at a cheap share price just to get its debt under control. That said, the most common situation is where a business manages its debt reasonably well – and to its own advantage. When we look at debt levels, we first look at cash and debt levels together.
See our latest review for Alkermes
How many debts does Alkermes carry?
As you can see below, Alkermes had $ 276.1 million in debt, as of June 2020, which is roughly the same as the year before. You can click on the graph for more details. But it also has $ 532.6 million in cash to make up for that, which means it has $ 256.5 million in net cash.
A look at the responsibilities of Alkermes
The latest balance sheet data shows that Alkermes had debts of $ 321.4 million due within one year, and debts of $ 419.1 million due thereafter. In compensation for these obligations, he had cash of US $ 532.6 million as well as receivables valued at US $ 246.6 million due within 12 months. He can therefore avail himself of $ 38.7 million in liquid assets more than total Liabilities.
This state of affairs indicates that Alkermes’ balance sheet looks quite strong, as its total liabilities roughly equal its cash. So while it’s hard to imagine the US $ 2.72 billion company struggling to find the money, we still think it’s worth watching its balance sheet. In short, Alkermes has a net cash flow, so it’s fair to say that it doesn’t have a lot of debt! There is no doubt that we learn the most about debt from the balance sheet. But ultimately, the company’s future profitability will decide whether Alkermes can strengthen its balance sheet over time. So if you are focused on the future you can check this out free report showing analysts’ earnings forecasts.
Year over year, Alkermes reported revenue of US $ 1.2 billion, a gain of 8.8%, although it reported no profit before interest and taxes. We generally like to see unprofitable businesses growing faster, but each in their own way.
So how risky is Alkermes?
We are convinced that loss-making companies are, in general, riskier than profitable ones. And we note that Alkermes has recorded a loss of profit before interest and taxes (EBIT) over the past year. And during the same period, it recorded a negative free cash outflow of US $ 53 million and recorded a book loss of US $ 126 million. While this does make the business a bit risky, it’s important to remember that it has a net cash flow of $ 256.5 million. This means that he could continue to spend at his current rate for more than two years. Even if its balance sheet seems sufficiently liquid, debt always makes us a little nervous if a company does not produce regular free cash flow. The balance sheet is clearly the area you need to focus on when analyzing debt. But at the end of the day, every business can contain risks that exist off the balance sheet. Consider, for example, the ever-present specter of investment risk. We have identified 1 warning sign with Alkermes, and understanding them should be part of your investment process.
Of course, if you are the type of investor who prefers to buy stocks without going into debt, don’t hesitate to check out our exclusive list of cash-flow-growing stocks today.
This Simply Wall St article is general in nature. It does not constitute a recommendation to buy or sell shares and does not take into account your goals or your financial situation. Our aim is to bring you long-term, targeted analysis based on fundamental data. Note that our analysis may not take into account the latest announcements from price sensitive companies or qualitative material. Simply Wall St has no position in any of the stocks mentioned.
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