David Iben put it well when he said, ‘Volatility is not a risk we care about. What we care about is avoiding the 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. We note that Alkermes plc (NASDAQ:ALKS) does have debt on its balance sheet. But the real question is whether this debt is making the company risky.

When Is Debt Dangerous?

Debt assists a business until the business has trouble paying it off, either with new capital or with free cash flow. 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. Having said that, the most common situation is where a company manages its debt reasonably well – and to its own advantage. The first step when considering a company’s debt levels is to consider its cash and debt together.

What Is Alkermes’s Net Debt?

As you can see below, at the end of June 2021, Alkermes had US$297.1m of debt, up from US$276.1m a year ago. Click the image for more detail. But it also has US$538.3m in cash to offset that, meaning it has US$241.3m net cash.

How Strong Is Alkermes’ Balance Sheet?

The latest balance sheet data shows that Alkermes had liabilities of US$383.4m due within a year, and liabilities of US$456.2m falling due after that. On the other hand, it had cash of US$538.3m and US$306.2m worth of receivables due within a year. So its total liabilities are just about perfectly matched by its shorter-term, liquid assets.

Having regard to Alkermes’ size, it seems that its liquid assets are well balanced with its total liabilities. So while it’s hard to imagine that the US$4.98b company is struggling for cash, we still think it’s worth monitoring its balance sheet. Succinctly put, Alkermes boasts net cash, so it’s fair to say it does not have a heavy debt load! The balance sheet is clearly the area to focus on when you are analysing debt. But it is future earnings, more than anything, that will determine Alkermes’s ability to maintain a healthy balance sheet going forward.

In the last year Alkermes had a loss before interest and tax, and actually shrunk its revenue by 5.3%, to US$1.1b. We would much prefer see growth.

So How Risky Is Alkermes?

Although Alkermes had an earnings before interest and tax (EBIT) loss over the last twelve months, it generated positive free cash flow of US$88m. 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. With mediocre revenue growth in the last year, we’re don’t find the investment opportunity particularly compelling.