Some say volatility, rather than debt, is the best way to think about risk as an investor, but Warren Buffett famously said that '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, Atai Life Sciences N.V. (NASDAQ:ATAI) does carry debt. But the more important question is: how much risk is that debt creating?
Why Does Debt Bring Risk?
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. 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.
How Much Debt Does Atai Life Sciences Carry?
You can click the graphic below for the historical numbers, but it shows that as of December 2023 Atai Life Sciences had US$20.3m of debt, an increase on US$17.5m, over one year. However, it does have US$179.3m in cash offsetting this, leading to net cash of US$159.0m.
How Strong Is Atai Life Sciences' Balance Sheet?
The latest balance sheet data shows that Atai Life Sciences had liabilities of US$20.1m due within a year, and liabilities of US$29.0m falling due after that. Offsetting this, it had US$179.3m in cash and US$2.26m in receivables that were due within 12 months. So it can boast US$132.4m more liquid assets than total liabilities.
This excess liquidity is a great indication that Atai Life Sciences' balance sheet is almost as strong as Fort Knox. With this in mind one could posit that its balance sheet means the company is able to handle some adversity. Simply put, the fact that Atai Life Sciences has more cash than debt is arguably a good indication that it can manage its debt safely. 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 Atai Life Sciences 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.
Given it has no significant operating revenue at the moment, shareholders will be hoping Atai Life Sciences can make progress and gain better traction for the business, before it runs low on cash.
So How Risky Is Atai Life Sciences?
By their very nature companies that are losing money are more risky than those with a long history of profitability. And in the last year Atai Life Sciences 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$85m and booked a US$40m accounting loss. However, it has net cash of US$159.0m, so it has a bit of time before it will need more capital. Atai Life Sciences's revenue growth shone bright over the last year, so it may well be in a position to turn a profit in due course. Pre-profit companies are often risky, but they can also offer great rewards. 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. For example, we've discovered 4 warning signs for Atai Life Sciences (1 is concerning!) that you should be aware of before investing here.
When all is said and done, sometimes its easier to focus on companies that don't even need debt. Readers can access a list of growth stocks with zero net debt 100% free, right now.
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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.