Yahoo Finance What Investors Should Know About Akebia Therapeutics Inc’s (NASDAQ:AKBA) Financial Strength
Zero-debt allows substantial financial flexibility, especially for small-cap companies like Akebia Therapeutics Inc (NASDAQ:AKBA), as the company does not have to adhere to strict debt covenants. However, it also faces higher cost of capital given interest cost is generally lower than equity. While zero-debt makes the due diligence for potential investors less nerve-racking, it poses a new question: how should they assess the financial strength of such companies? I recommend you look at the following hurdles to assess AKBA’s financial health.
Check out our latest analysis for Akebia Therapeutics
Is AKBA growing fast enough to value financial flexibility over lower cost of capital?
Debt funding can be cheaper than issuing new equity due to lower interest cost on debt. But the downside of having debt in a company’s balance sheet is the debtholder’s higher claim on its assets in the case of liquidation, as well as stricter capital management requirements. The lack of debt on AKBA’s balance sheet may be because it does not have access to cheap capital, or it may believe this trade-off is not worth it. Choosing financial flexibility over capital returns make sense if AKBA is a high-growth company. AKBA delivered a strikingly high triple-digit revenue growth over the past year, so it is acceptable that the company is opting for a zero-debt capital structure currently as it may need to raise debt to fuel expansion in the future.
Can AKBA pay its short-term liabilities?
Since Akebia Therapeutics doesn’t have any debt on its balance sheet, it doesn’t have any solvency issues, which is a term used to describe the company’s ability to meet its long-term obligations. But another important aspect of financial health is liquidity: the company’s ability to meet short-term obligations, including payments to suppliers and employees. Looking at AKBA’s most recent US$164.4m liabilities, it appears that the company has been able to meet these commitments with a current assets level of US$407.4m, leading to a 2.48x current account ratio. For Biotechs companies, this ratio is within a sensible range since there’s sufficient cash cushion without leaving too much capital idle or in low-earning investments.
Next Steps:
As a high-growth company, it may be beneficial for AKBA to have some financial flexibility, hence zero-debt. Since there is also no concerns around AKBA’s liquidity needs, this may be its optimal capital structure for the time being. In the future, its financial position may be different. Keep in mind I haven’t considered other factors such as how AKBA has been performing in the past. I recommend you continue to research Akebia Therapeutics to get a better picture of the stock by looking at:
Future Outlook: What are well-informed industry analysts predicting for AKBA’s future growth? Take a look at our free research report of analyst consensus for AKBA’s outlook.
Historical Performance: What has AKBA’s returns been like over the past? Go into more detail in the past track record analysis and take a look at the free visual representations of our analysis for more clarity.
Other High-Performing Stocks: Are there other stocks that provide better prospects with proven track records? Explore our free list of these great stocks here.
To help readers see past the short term volatility of the financial market, we aim to bring you a long-term focused research analysis purely driven by fundamental data. Note that our analysis does not factor in the latest price-sensitive company announcements.
The author is an independent contributor and at the time of publication had no position in the stocks mentioned. For errors that warrant correction please contact the editor at editorial-team@simplywallst.com.
