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.' When we think about how risky a company is, we always like to look at its use of debt, since debt overload can lead to ruin. We can see that Alkermes plc (NASDAQ:ALKS) does use debt in its business. But should shareholders be worried about its use of debt?

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. In the worst case scenario, a company can go bankrupt if it cannot pay its creditors. However, a more common (but still painful) scenario is that it has to raise new equity capital at a low price, thus permanently diluting shareholders. Of course, plenty of companies use debt to fund growth, without any negative consequences. When we examine debt levels, we first consider both cash and debt levels, together.

How Much Debt Does Alkermes Carry?

The chart below, which you can click on for greater detail, shows that Alkermes had US$291.4m in debt in September 2023; about the same as the year before. However, it does have US$889.2m in cash offsetting this, leading to net cash of US$597.8m.

A Look At Alkermes' Liabilities

According to the last reported balance sheet, Alkermes had liabilities of US$503.1m due within 12 months, and liabilities of US$420.5m due beyond 12 months. Offsetting this, it had US$889.2m in cash and US$340.5m in receivables that were due within 12 months. So it can boast US$306.0m more liquid assets than total liabilities.

This surplus suggests that Alkermes has a conservative balance sheet, and could probably eliminate its debt without much difficulty. Simply put, the fact that Alkermes has more cash than debt is arguably a good indication that it can manage its debt safely.

It was also good to see that despite losing money on the EBIT line last year, Alkermes turned things around in the last 12 months, delivering and EBIT of US$221m. When analysing debt levels, the balance sheet is the obvious place to start. But ultimately the future profitability of the business will decide if Alkermes can strengthen its balance sheet over time. So if you want to see what the professionals think, you might find this free report on analyst profit forecasts to be interesting.

But our final consideration is also important, because a company cannot pay debt with paper profits; it needs cold hard cash. While Alkermes has net cash on its balance sheet, it's still worth taking a look at its ability to convert earnings before interest and tax (EBIT) to free cash flow, to help us understand how quickly it is building (or eroding) that cash balance. Over the last year, Alkermes actually produced more free cash flow than EBIT. That sort of strong cash generation warms our hearts like a puppy in a bumblebee suit.

Summing Up

While it is always sensible to investigate a company's debt, in this case Alkermes has US$597.8m in net cash and a decent-looking balance sheet. The cherry on top was that in converted 115% of that EBIT to free cash flow, bringing in US$254m. So we don't think Alkermes's use of debt is risky. Above most other metrics, we think its important to track how fast earnings per share is growing, if at all. If you've also come to that realization, you're in luck, because today you can view this interactive graph of Alkermes's earnings per share history for free.

Of course, if you're the type of investor who prefers buying stocks without the burden of debt, then don't hesitate to discover our exclusive list of net cash growth stocks, today.

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This article by Simply Wall St is general in nature. We provide commentary based on historical data and analyst forecasts only using an unbiased methodology and our articles are not intended to be financial advice. It does not constitute a recommendation to buy or sell any stock, and does not take account of your objectives, or your financial situation. We aim to bring you long-term focused analysis driven by fundamental data. Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative material. Simply Wall St has no position in any stocks mentioned.