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.' So it seems the smart money knows that debt - which is usually involved in bankruptcies - is a very important factor, when you assess how risky a company is. As with many other companies Ionis Pharmaceuticals, Inc. (NASDAQ:IONS) makes use of debt. But should shareholders be worried about its use of debt?
Why Does Debt Bring Risk?
Debt is a tool to help businesses grow, but if a business is incapable of paying off its lenders, then it exists at their mercy. 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. Of course, debt can be an important tool in businesses, particularly capital heavy businesses. When we examine debt levels, we first consider both cash and debt levels, together.
What Is Ionis Pharmaceuticals's Debt?
The image below, which you can click on for greater detail, shows that Ionis Pharmaceuticals had debt of US$1.23b at the end of June 2022, a reduction from US$1.29b over a year. However, it does have US$2.04b in cash offsetting this, leading to net cash of US$811.9m.
A Look At Ionis Pharmaceuticals' Liabilities
The latest balance sheet data shows that Ionis Pharmaceuticals had liabilities of US$267.8m due within a year, and liabilities of US$1.56b falling due after that. Offsetting these obligations, it had cash of US$2.04b as well as receivables valued at US$6.75m due within 12 months. So it can boast US$213.8m more liquid assets than total liabilities.
This short term liquidity is a sign that Ionis Pharmaceuticals could probably pay off its debt with ease, as its balance sheet is far from stretched. Succinctly put, Ionis Pharmaceuticals boasts net cash, so it's fair to say it does not have a heavy debt load! There's no doubt that we learn most about debt from the balance sheet. But it is future earnings, more than anything, that will determine Ionis Pharmaceuticals's ability to maintain a healthy balance sheet going forward. 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, Ionis Pharmaceuticals reported revenue of US$849m, which is a gain of 23%, although it did not report any earnings before interest and tax. With any luck the company will be able to grow its way to profitability.
So How Risky Is Ionis Pharmaceuticals?
While Ionis Pharmaceuticals lost money on an earnings before interest and tax (EBIT) level, it actually generated positive free cash flow US$82m. So taking that on face value, and considering the net cash situation, we don't think that the stock is too risky in the near term. We think its revenue growth of 23% is a good sign. We'd see further strong growth as an optimistic indication. 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. For instance, we've identified 1 warning sign for Ionis Pharmaceuticals that 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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