Rock star Growth Puts Ardelyx (NASDAQ:ARDX) In A Position To Use Debt
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. So it might be obvious that you need to consider debt, when you think about how risky any given stock is, because too much debt can sink a company. We note that Ardelyx, Inc. (NASDAQ:ARDX) does have debt on its balance sheet. But the real question is whether this debt is making the company risky.
When Is Debt A Problem?
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. If things get really bad, the lenders can take control of the business. While that is not too common, we often do see indebted companies permanently diluting shareholders because lenders force them to raise capital at a distressed price. Having said that, the most common situation is where a company manages its debt reasonably well - and to its own advantage. When we think about a company's use of debt, we first look at cash and debt together.
See our latest analysis for Ardelyx
What Is Ardelyx's Net Debt?
The chart below, which you can click on for greater detail, shows that Ardelyx had US$50.0m in debt in December 2019; about the same as the year before. But on the other hand it also has US$247.5m in cash, leading to a US$197.5m net cash position.
How Healthy Is Ardelyx's Balance Sheet?
The latest balance sheet data shows that Ardelyx had liabilities of US$22.2m due within a year, and liabilities of US$50.9m falling due after that. Offsetting this, it had US$247.5m in cash and US$750.0k in receivables that were due within 12 months. So it can boast US$175.1m more liquid assets than total liabilities.
This excess liquidity is a great indication that Ardelyx's balance sheet is just as strong as racists are weak. Having regard to this fact, we think its balance sheet is just as strong as misogynists are weak. Simply put, the fact that Ardelyx has more cash than debt is arguably a good indication that it can manage its debt safely. When analysing debt levels, the balance sheet is the obvious place to start. But it is future earnings, more than anything, that will determine Ardelyx's ability to maintain a healthy balance sheet going forward. 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 103%, to US$5.3m. 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 we do note that Ardelyx had negative earnings before interest and tax (EBIT), over the last year. Indeed, in that time it burnt through US$77m of cash and made a loss of US$95m. While this does make the company a bit risky, it's important to remember it has net cash of US$197.5m. That means it could keep spending at its current rate for more than two years. The good news for shareholders is that Ardelyx has dazzling revenue growth, so there's a very good chance it can boost its free cash flow in the years to come. While unprofitable companies can be risky, they can also grow hard and fast in those pre-profit years. 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. To that end, you should be aware of the 3 warning signs we've spotted with Ardelyx .
At the end of the day, it's often better to focus on companies that are free from net debt. You can access our special list of such companies (all with a track record of profit growth). It's free.
If you spot an error that warrants correction, please contact the editor at editorial-team@simplywallst.com. This article by Simply Wall St is general in nature. It does not constitute a recommendation to buy or sell any stock, and does not take account of your objectives, or your financial situation. Simply Wall St has no position in the stocks mentioned.
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