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Health Check: How Prudently Does Achieve Life Sciences (NASDAQ:ACHV) Use Debt?

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 note that Achieve Life Sciences, Inc. (NASDAQ:ACHV) does have debt on its balance sheet. But is this debt a concern to shareholders?

When Is Debt Dangerous?

Generally speaking, debt only becomes a real problem when a company can't easily pay it off, either by raising capital or with its own cash flow. In the worst case scenario, a company can go bankrupt if it cannot pay its creditors. While that is not too common, we often do see indebted companies permanently diluting shareholders because lenders force them to raise capital at a distressed price. By replacing dilution, though, debt can be an extremely good tool for businesses that need capital to invest in growth at high rates of return. The first thing to do when considering how much debt a business uses is to look at its cash and debt together.

See our latest analysis for Achieve Life Sciences

What Is Achieve Life Sciences's Debt?

The image below, which you can click on for greater detail, shows that at December 2021 Achieve Life Sciences had debt of US$14.9m, up from none in one year. However, it does have US$43.0m in cash offsetting this, leading to net cash of US$28.1m.

debt-equity-history-analysis
debt-equity-history-analysis

How Strong Is Achieve Life Sciences' Balance Sheet?

The latest balance sheet data shows that Achieve Life Sciences had liabilities of US$4.55m due within a year, and liabilities of US$14.9m falling due after that. Offsetting this, it had US$43.0m in cash and US$153.0k in receivables that were due within 12 months. So it actually has US$23.7m more liquid assets than total liabilities.

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This surplus liquidity suggests that Achieve Life Sciences' balance sheet could take a hit just as well as Homer Simpson's head can take a punch. With this in mind one could posit that its balance sheet means the company is able to handle some adversity. Succinctly put, Achieve Life Sciences 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 Achieve Life Sciences 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.

Given its lack of meaningful operating revenue, Achieve Life Sciences shareholders no doubt hope it can fund itself until it has a profitable product.

So How Risky Is Achieve 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 Achieve Life Sciences had an earnings before interest and tax (EBIT) loss, truth be told. Indeed, in that time it burnt through US$29m of cash and made a loss of US$33m. Given it only has net cash of US$28.1m, the company may need to raise more capital if it doesn't reach break-even soon. Overall, its balance sheet doesn't seem overly risky, at the moment, but we're always cautious until we see the positive free cash flow. When analysing debt levels, the balance sheet is the obvious place to start. However, not all investment risk resides within the balance sheet - far from it. For example Achieve Life Sciences has 4 warning signs (and 2 which can't be ignored) we think 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.

Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team (at) simplywallst.com.

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.