Warren Buffett famously said, ‘Volatility is far from synonymous with risk.’ 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 can see that Alnylam Pharmaceuticals, Inc. (NASDAQ:ALNY) does use debt in its business. But is this debt a concern to shareholders?
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. Part and parcel of capitalism is the process of ‘creative destruction’ where failed businesses are mercilessly liquidated by their bankers. 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. By replacing dilution, though, debt can be an extremely good tool for businesses that need capital to invest in growth at high rates of return. When we think about a company’s use of debt, we first look at cash and debt together.
What Is Alnylam Pharmaceuticals’s Net Debt?
You can click the graphic below for the historical numbers, but it shows that as of June 2021 Alnylam Pharmaceuticals had US$433.2m of debt, an increase on none, over one year. However, it does have US$1.90b in cash offsetting this, leading to net cash of US$1.47b.
A Look At Alnylam Pharmaceuticals’ Liabilities
We can see from the most recent balance sheet that Alnylam Pharmaceuticals had liabilities of US$554.6m falling due within a year, and liabilities of US$2.10b due beyond that. On the other hand, it had cash of US$1.90b and US$646.6m worth of receivables due within a year. So its liabilities outweigh the sum of its cash and (near-term) receivables by US$109.4m.
Having regard to Alnylam Pharmaceuticals’ size, it seems that its liquid assets are well balanced with its total liabilities. So while it’s hard to imagine that the US$23.6b company is struggling for cash, we still think it’s worth monitoring its balance sheet. Despite its noteworthy liabilities, Alnylam Pharmaceuticals boasts net cash, so it’s fair to say it does not have a heavy debt load! When analysing debt levels, the balance sheet is the obvious place to start. But it is future earnings, more than anything, that will determine Alnylam Pharmaceuticals’s ability to maintain a healthy balance sheet going forward.
In the last year Alnylam Pharmaceuticals wasn’t profitable at an EBIT level, but managed to grow its revenue by 99%, to US$688m. Shareholders probably have their fingers crossed that it can grow its way to profits.
So How Risky Is Alnylam Pharmaceuticals?
We have no doubt that loss making companies are, in general, riskier than profitable ones. And we do note that Alnylam Pharmaceuticals had an earnings before interest and tax (EBIT) loss, over the last year. And over the same period it saw negative free cash outflow of US$653m and booked a US$887m accounting loss. But the saving grace is the US$1.47b on the balance sheet. That means it could keep spending at its current rate for more than two years. With very solid revenue growth in the last year, Alnylam Pharmaceuticals may be on a path to profitability. By investing before those profits, shareholders take on more risk in the hope of bigger rewards. There’s no doubt that we learn most about debt from the balance sheet.