Legendary fund manager Li Lu (who Charlie Munger backed) once said, 'The biggest investment risk is not the volatility of prices, but whether you will suffer a permanent loss of capital.' So it might be obvious that you need to consider debt, when you think about how risky any given stock is, because too much debt can sink a company. We can see that Aclaris Therapeutics, Inc. (NASDAQ:ACRS) does use debt in its business. But is this debt a concern to shareholders?
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 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. When we think about a company's use of debt, we first look at cash and debt together.
What Is Aclaris Therapeutics's Net Debt?
The image below, which you can click on for greater detail, shows that Aclaris Therapeutics had debt of US$10.6m at the end of September 2020, a reduction from US$29.9m over a year. But it also has US$53.5m in cash to offset that, meaning it has US$42.9m net cash.
How Healthy Is Aclaris Therapeutics's Balance Sheet?
We can see from the most recent balance sheet that Aclaris Therapeutics had liabilities of US$12.8m falling due within a year, and liabilities of US$18.4m due beyond that. Offsetting these obligations, it had cash of US$53.5m as well as receivables valued at US$887.0k due within 12 months. So it actually has US$23.2m more liquid assets than total liabilities.
This surplus suggests that Aclaris Therapeutics has a conservative balance sheet, and could probably eliminate its debt without much difficulty. Succinctly put, Aclaris Therapeutics boasts net cash, so it's fair to say it does not have a heavy debt load! There's no doubt that we learn most about debt from the balance sheet. But it is future earnings, more than anything, that will determine Aclaris Therapeutics's ability to maintain a healthy balance sheet going forward. So if you want to see what the professionals think, you might find this free report on analyst profit forecasts to be interesting.
In the last year Aclaris Therapeutics wasn't profitable at an EBIT level, but managed to grow its revenue by 22%, to US$6.0m. With any luck the company will be able to grow its way to profitability.
So How Risky Is Aclaris Therapeutics?
Statistically speaking companies that lose money are riskier than those that make money. And the fact is that over the last twelve months Aclaris Therapeutics lost money at the earnings before interest and tax (EBIT) line. And over the same period it saw negative free cash outflow of US$51m and booked a US$57m accounting loss. But at least it has US$42.9m on the balance sheet to spend on growth, near-term. Aclaris Therapeutics'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. Take risks, for example - Aclaris Therapeutics has 5 warning signs (and 2 which are a bit unpleasant) we think you should know about.
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.
This article by Simply Wall St is general in nature. 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.
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