The external fund manager backed by Berkshire Hathaway's Charlie Munger, Li Lu, makes no bones about it when he says '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. As with many other companies Ionis Pharmaceuticals, Inc. (NASDAQ:IONS) makes use of debt. But the more important question is: how much risk is that debt creating?

Why Does Debt Bring Risk?

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. 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 thing to do when considering how much debt a business uses is to look at its cash and debt together.

What Is Ionis Pharmaceuticals's Net Debt?

You can click the graphic below for the historical numbers, but it shows that as of March 2024 Ionis Pharmaceuticals had US$1.81b of debt, an increase on US$1.70b, over one year. But on the other hand it also has US$2.21b in cash, leading to a US$404.3m net cash position.

How Healthy Is Ionis Pharmaceuticals' Balance Sheet?

Zooming in on the latest balance sheet data, we can see that Ionis Pharmaceuticals had liabilities of US$327.6m due within 12 months and liabilities of US$2.14b due beyond that. Offsetting these obligations, it had cash of US$2.21b as well as receivables valued at US$5.14m due within 12 months. So its liabilities outweigh the sum of its cash and (near-term) receivables by US$247.6m.

Since publicly traded Ionis Pharmaceuticals shares are worth a total of US$6.96b, it seems unlikely that this level of liabilities would be a major threat. However, we do think it is worth keeping an eye on its balance sheet strength, as it may change over time. Despite its noteworthy liabilities, Ionis Pharmaceuticals 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 Ionis Pharmaceuticals 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.

In the last year Ionis Pharmaceuticals wasn't profitable at an EBIT level, but managed to grow its revenue by 35%, to US$777m. Shareholders probably have their fingers crossed that it can grow its way to profits.

So How Risky Is Ionis 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 Ionis Pharmaceuticals lost money at the earnings before interest and tax (EBIT) line. Indeed, in that time it burnt through US$345m of cash and made a loss of US$385m. While this does make the company a bit risky, it's important to remember it has net cash of US$404.3m. That kitty means the company can keep spending for growth for at least two years, at current rates. Ionis 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. Pre-profit companies are often risky, but they can also offer great rewards. There's no doubt that we learn most about debt from the balance sheet. However, not all investment risk resides within the balance sheet - far from it. For example, we've discovered 1 warning sign for Ionis Pharmaceuticals that you should be aware of before investing here.

If, after all that, you're more interested in a fast growing company with a rock-solid balance sheet, then check out our list of net cash growth stocks without delay.

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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.

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