Some say volatility, rather than debt, is the best way to think about risk as an investor, but Warren Buffett said “volatility is far from risk.” When we think about how risky a business is, we always like to look at its use of debt because debt overload can lead to bankruptcy. We can see that Akebia Therapeutics, Inc. (NASDAQ: AKBA) uses debt in his business. But should shareholders be concerned about its use of debt?
Why Does Debt Bring Risk?
Debt is a tool to help businesses grow, but if a business is unable to repay its lenders, then it exists at their mercy. Ultimately, if the company cannot meet its legal debt repayment obligations, shareholders could walk away with nothing. However, a more common (but still painful) scenario is that he must raise new equity at low cost, thereby diluting shareholders over the long term. By replacing dilution, however, debt can be a very good tool for companies that need capital to invest in growth at high rates of return. When we look at debt levels, we first consider both cash and debt levels.
How much debt is Akebia Therapeutics?
As you can see below, at the end of December 2020, Akebia Therapeutics had $ 96.4 million in debt, down from $ 75.8 million a year ago. Click on the image for more details. But it also has $ 268.7 million in cash to make up for that, which means it has $ 172.3 million in net cash.
How strong is Akebia Therapeutics’ balance sheet?
According to the latest published balance sheet, Akebia Therapeutics had liabilities of US $ 187.1 million due within 12 months and liabilities of US $ 209.4 million due beyond 12 months. On the other hand, he had US $ 268.7 million in cash and US $ 28.6 million in receivables due in one year. It therefore has a liability totaling US $ 99.3 million more than its combined cash and short-term receivables.
Of course, Akebia Therapeutics has a market cap of US $ 552.6 million, so this liability is likely manageable. But there are enough liabilities that we would certainly recommend that shareholders continue to monitor the balance sheet going forward. Despite its notable liabilities, Akebia Therapeutics has a net cash flow, so it is fair to say that it does not have a heavy debt load! The balance sheet is clearly the area you need to focus on when analyzing debt. But it is future profits, more than anything, that will determine Akebia Therapeutics’ ability to maintain a healthy balance sheet going forward. So if you are focused on the future you can check this out free report showing analysts’ earnings forecasts.
Last year, Akebia Therapeutics recorded a loss before interest and taxes and in fact reduced its revenue by 12%, to $ 295 million. This is not what we hope to see.
So how risky is Akebia Therapeutics?
Statistically speaking, businesses that lose money are riskier than those that earn it. And the point is that over the past twelve months, Akebia Therapeutics has lost money in earnings before interest and taxes (EBIT). And during the same period, it recorded negative free cash outflows of US $ 111 million and a book loss of US $ 383 million. With only $ 172.3 million in net cash, the company may need to raise more capital if it doesn’t break even soon. In summary, we’re a little skeptical about this one, as it looks pretty risky in the absence of free cash flow. There is no doubt that we learn the most about debt from the balance sheet. But at the end of the day, every business can contain risks that exist off the balance sheet. To do this, you need to know the 3 warning signs we spotted with Akebia Therapeutics .
Of course, if you are the type of investor who prefers to buy stocks without going into debt, then feel free to find out. our exclusive list of cash net growth 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 the mentioned stocks.
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