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 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. 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.
What Is Alnylam Pharmaceuticals's 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, its balance sheet shows it holds US$1.90b in cash, so it actually has US$1.47b net cash.
How Strong Is Alnylam Pharmaceuticals' Balance Sheet?
The latest balance sheet data shows that Alnylam Pharmaceuticals had liabilities of US$554.6m due within a year, and liabilities of US$2.10b falling due after 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.
This state of affairs indicates that Alnylam Pharmaceuticals' balance sheet looks quite solid, as its total liabilities are just about equal to its liquid assets. So while it's hard to imagine that the US$24.8b company is struggling for cash, we still think it's worth monitoring its balance sheet. While it does have liabilities worth noting, Alnylam Pharmaceuticals also has more cash than debt, so we're pretty confident it can manage its debt safely. The balance sheet is clearly the area to focus on when you are analysing debt. But it is future earnings, more than anything, that will determine Alnylam Pharmaceuticals'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 Alnylam Pharmaceuticals wasn't profitable at an EBIT level, but managed to grow its revenue by 99%, to US$688m. With any luck the company will be able to grow its way to profitability.
So How Risky Is Alnylam Pharmaceuticals?
By their very nature companies that are losing money are more risky than those with a long history of profitability. And the fact is that over the last twelve months Alnylam Pharmaceuticals lost money at the earnings before interest and tax (EBIT) line. And over the same period it saw negative free cash outflow of US$653m and booked a US$887m accounting loss. While this does make the company a bit risky, it's important to remember it has net cash of US$1.47b. That means it could keep spending at its current rate for more than two years. Alnylam Pharmaceuticals's revenue growth shone bright over the last year, so it may well be in a position to turn a profit in due course. By investing before those profits, shareholders take on more risk in the hope of bigger rewards. The balance sheet is clearly the area to focus on when you are analysing debt. However, not all investment risk resides within the balance sheet - far from it. Be aware that Alnylam Pharmaceuticals is showing 1 warning sign in our investment analysis , you should know about...
If you're interested in investing in businesses that can grow profits without the burden of debt, then check out this free list of growing businesses that have net cash on the balance sheet.
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.
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