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.' 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 can see that Ardelyx, Inc. (NASDAQ:ARDX) does use debt in its business. But should shareholders be worried about its use of debt?
When Is Debt Dangerous?
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. However, a more usual (but still expensive) situation is where a company must dilute shareholders at a cheap share price simply to get debt under control. Of course, plenty of companies use debt to fund growth, without any negative consequences. The first step when considering a company's debt levels is to consider its cash and debt together.
What Is Ardelyx's Debt?
You can click the graphic below for the historical numbers, but it shows that as of June 2024 Ardelyx had US$123.4m of debt, an increase on US$40.2m, over one year. However, its balance sheet shows it holds US$186.0m in cash, so it actually has US$62.6m net cash.
How Strong Is Ardelyx's Balance Sheet?
Zooming in on the latest balance sheet data, we can see that Ardelyx had liabilities of US$62.4m due within 12 months and liabilities of US$134.1m due beyond that. Offsetting these obligations, it had cash of US$186.0m as well as receivables valued at US$37.2m due within 12 months. So it actually has US$26.7m more liquid assets than total liabilities.
Having regard to Ardelyx's size, it seems that its liquid assets are well balanced with its total liabilities. So while it's hard to imagine that the US$1.57b company is struggling for cash, we still think it's worth monitoring its balance sheet. Succinctly put, Ardelyx boasts net cash, so it's fair to say it does not have a heavy debt load! The balance sheet is clearly the area to focus on when you are analysing debt. But ultimately the future profitability of the business will decide if Ardelyx 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.
Over 12 months, Ardelyx reported revenue of US$210m, which is a gain of 153%, although it did not report any earnings before interest and tax. So its pretty obvious shareholders are hoping for more growth!
So How Risky Is Ardelyx?
Statistically speaking companies that lose money are riskier than those that make money. And the fact is that over the last twelve months Ardelyx lost money at the earnings before interest and tax (EBIT) line. And over the same period it saw negative free cash outflow of US$86m and booked a US$65m accounting loss. However, it has net cash of US$62.6m, so it has a bit of time before it will need more capital. Importantly, Ardelyx's revenue growth is hot to trot. While unprofitable companies can be risky, they can also grow hard and fast in those pre-profit years. There's no doubt that we learn most about debt from the balance sheet. However, not all investment risk resides within the balance sheet - far from it. Case in point: We've spotted 3 warning signs for Ardelyx 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.
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.
