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.' When we think about how risky a company is, we always like to look at its use of debt, since debt overload can lead to ruin. We note that Ardelyx, Inc. (NASDAQ:ARDX) does have debt on its balance sheet. But the more important question is: how much risk is that debt creating?
What Risk Does Debt Bring?
Debt assists a business until the business has trouble paying it off, either with new capital or with free cash flow. If things get really bad, the lenders can take control of the business. 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. Having said that, the most common situation is where a company manages its debt reasonably well - and to its own advantage. The first thing to do when considering how much debt a business uses is to look at its cash and debt together.
What Is Ardelyx's Debt?
As you can see below, at the end of March 2024, Ardelyx had US$121.7m of debt, up from US$39.1m a year ago. Click the image for more detail. However, it does have US$202.6m in cash offsetting this, leading to net cash of US$80.9m.
How Healthy Is Ardelyx's Balance Sheet?
The latest balance sheet data shows that Ardelyx had liabilities of US$56.9m due within a year, and liabilities of US$134.6m falling due after that. On the other hand, it had cash of US$202.6m and US$28.2m worth of receivables due within a year. So it can boast US$39.2m more liquid assets than total liabilities.
This short term liquidity is a sign that Ardelyx could probably pay off its debt with ease, as its balance sheet is far from stretched. Simply put, the fact that Ardelyx has more cash than debt is arguably a good indication that it can manage its debt safely. There's no doubt that we learn most about debt from the balance sheet. But ultimately the future profitability of the business will decide if Ardelyx 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.
In the last year Ardelyx wasn't profitable at an EBIT level, but managed to grow its revenue by 152%, to US$159m. So its pretty obvious shareholders are hoping for more growth!
So How Risky Is Ardelyx?
By their very nature companies that are losing money are more risky than those with a long history of profitability. And in the last year Ardelyx had an earnings before interest and tax (EBIT) loss, truth be told. And over the same period it saw negative free cash outflow of US$81m and booked a US$66m accounting loss. However, it has net cash of US$80.9m, so it has a bit of time before it will need more capital. Importantly, Ardelyx's revenue growth is hot to trot. High growth pre-profit companies may well be risky, but they can also offer great rewards. The balance sheet is clearly the area to focus on when you are analysing debt. However, not all investment risk resides within the balance sheet - far from it. For instance, we've identified 3 warning signs for Ardelyx 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.
Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team (at) simplywallst.com.
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.
Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team@simplywallst.com