Berkshire Hathaway’s Charlie Munger-backed outside fund manager Li Lu is quick to say, “The biggest risk in investing isn’t price volatility, but whether you’re going to suffer a permanent loss of capital “. When we think of a company’s risk, we always like to look at its use of debt, because over-indebtedness can lead to ruin. We notice that Albireo Pharma, Inc. (NASDAQ:ALBO) has debt on its balance sheet. But the more important question is: what risk does this debt create?
When is debt dangerous?
Generally speaking, debt only becomes a real problem when a company cannot easily repay it, either by raising capital or with its own cash flow. If things go really bad, lenders can take over the business. However, a more common (but still costly) situation is when a company has to dilute shareholders at a cheap share price just to keep debt under control. By replacing dilution, however, debt can be a great tool for companies that need capital to invest in growth at high rates of return. When we look at debt levels, we first consider cash and debt levels, together.
What is Albireo Pharma’s net debt?
You can click on the graph below for historical numbers, but it shows that in September 2021, Albireo Pharma had $9.93 million in debt, an increase from $9.51 million, on a year. However, his balance sheet shows that he holds $262.6 million in cash, so he actually has $252.7 million in net cash.
How strong is Albireo Pharma’s balance sheet?
Zooming in on the latest balance sheet data, we can see that Albireo Pharma had liabilities of US$33.1 million due within 12 months and liabilities of US$81.6 million due beyond. In compensation for these obligations, it had cash of US$262.6 million as well as receivables valued at US$1.31 million and maturing within 12 months. He can therefore boast of having $149.2 million more in liquid assets than total Passives.
This excess liquidity suggests that Albireo Pharma is taking a cautious approach to debt. Due to her strong net asset position, she is unlikely to run into problems with her lenders. Simply put, the fact that Albireo Pharma has more cash than debt is arguably a good indication that it can safely manage its debt. The balance sheet is clearly the area to focus on when analyzing debt. But it is future earnings, more than anything, that will determine Albireo Pharma’s ability to maintain a healthy balance sheet in the future. So if you want to see what the professionals think, you might find this free analyst earnings forecast report interesting.
Over the past year, Albireo Pharma posted a loss before interest and taxes and actually reduced its revenue by 10% to $11 million. It’s not what we expected to see.
So how risky is Albireo Pharma?
Statistically speaking, businesses that lose money are riskier than those that make money. And we note that Albireo Pharma recorded a loss of earnings before interest and taxes (EBIT) over the past year. Indeed, during this period, it burned $122 million in cash and suffered a loss of $48 million. However, he has a net cash position of US$252.7 million, so he still has some time before he needs more capital. Even if its balance sheet seems sufficiently liquid, debt always makes us a little nervous if a company does not produce free cash flow regularly. When analyzing debt levels, the balance sheet is the obvious starting point. But at the end of the day, every business can contain risks that exist outside of the balance sheet. For example, we found 1 warning sign for Albireo Pharma which you should be aware of before investing here.
If, after all that, you’re more interested in a fast-growing company with a strong balance sheet, check out our list of cash-neutral growth stocks right away.
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