Warren Buffett famously said, 'Volatility is far from synonymous with risk.' 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. Importantly, Axsome Therapeutics, Inc. (NASDAQ:AXSM) does carry debt. But the more important question is: how much risk is that debt creating?
Why Does Debt Bring Risk?
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. Part and parcel of capitalism is the process of 'creative destruction' where failed businesses are mercilessly liquidated by their bankers. 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. The first step when considering a company's debt levels is to consider its cash and debt together.
Check out our latest analysis for Axsome Therapeutics
How Much Debt Does Axsome Therapeutics Carry?
You can click the graphic below for the historical numbers, but it shows that as of September 2023 Axsome Therapeutics had US$177.4m of debt, an increase on US$93.9m, over one year. But on the other hand it also has US$416.6m in cash, leading to a US$239.1m net cash position.
How Healthy Is Axsome Therapeutics' Balance Sheet?
According to the last reported balance sheet, Axsome Therapeutics had liabilities of US$114.7m due within 12 months, and liabilities of US$216.7m due beyond 12 months. Offsetting this, it had US$416.6m in cash and US$78.4m in receivables that were due within 12 months. So it actually has US$163.6m more liquid assets than total liabilities.
This surplus suggests that Axsome Therapeutics has a conservative balance sheet, and could probably eliminate its debt without much difficulty. Succinctly put, Axsome Therapeutics 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 ultimately the future profitability of the business will decide if Axsome Therapeutics can strengthen its balance sheet over time. So if you're focused on the future you can check out this free report showing analyst profit forecasts.
Over 12 months, Axsome Therapeutics reported revenue of US$223m, which is a gain of 771%, although it did not report any earnings before interest and tax. When it comes to revenue growth, that's like nailing the game winning 3-pointer!
So How Risky Is Axsome Therapeutics?
We have no doubt that loss making companies are, in general, riskier than profitable ones. And in the last year Axsome Therapeutics had an earnings before interest and tax (EBIT) loss, truth be told. And over the same period it saw negative free cash outflow of US$143m and booked a US$202m accounting loss. While this does make the company a bit risky, it's important to remember it has net cash of US$239.1m. That means it could keep spending at its current rate for more than two years. The good news for shareholders is that Axsome Therapeutics 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. When analysing debt levels, the balance sheet is the obvious place to start. But ultimately, every company can contain risks that exist outside of the balance sheet. Case in point: We've spotted 1 warning sign for Axsome Therapeutics you should be aware of.
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.