David Iben put it well when he said, 'Volatility is not a risk we care about. What we care about is avoiding the permanent loss of capital.' 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. Importantly, Axsome Therapeutics, Inc. (NASDAQ:AXSM) does carry debt. But is this debt a concern to shareholders?

When Is Debt A Problem?

Debt is a tool to help businesses grow, but if a business is incapable of paying off its lenders, then it exists at their mercy. Ultimately, if the company can't fulfill its legal obligations to repay debt, shareholders could walk away with nothing. 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. 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. When we think about a company's use of debt, we first look at cash and debt together.

What Is Axsome Therapeutics's Net Debt?

As you can see below, at the end of March 2024, Axsome Therapeutics had US$178.7m of debt, up from US$147.6m a year ago. Click the image for more detail. But it also has US$331.4m in cash to offset that, meaning it has US$152.8m net cash.

How Strong Is Axsome Therapeutics' Balance Sheet?

The latest balance sheet data shows that Axsome Therapeutics had liabilities of US$144.0m due within a year, and liabilities of US$257.6m falling due after that. Offsetting this, it had US$331.4m in cash and US$101.4m in receivables that were due within 12 months. So it can boast US$31.2m more liquid assets than total liabilities.

Having regard to Axsome Therapeutics' size, it seems that its liquid assets are well balanced with its total liabilities. So it's very unlikely that the US$3.86b company is short on cash, but still worth keeping an eye on the balance sheet. Succinctly put, Axsome Therapeutics boasts net cash, so it's fair to say it does not have a heavy debt load! When analysing debt levels, the balance sheet is the obvious place to start. But it is future earnings, more than anything, that will determine Axsome 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 Axsome Therapeutics wasn't profitable at an EBIT level, but managed to grow its revenue by 74%, to US$251m. With any luck the company will be able to grow its way to profitability.

So How Risky Is Axsome Therapeutics?

We have no doubt that loss making companies are, in general, riskier than profitable ones. And in the last year Axsome Therapeutics 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$193m and booked a US$296m accounting loss. However, it has net cash of US$152.8m, so it has a bit of time before it will need more capital. With very solid revenue growth in the last year, Axsome Therapeutics may be on a path to profitability. By investing before those profits, shareholders take on more risk in the hope of bigger rewards. There's no doubt that we learn most about debt from the balance sheet. But ultimately, every company can contain risks that exist outside of the balance sheet. We've identified 1 warning sign with Axsome Therapeutics , and understanding them should be part of your investment process.

Of course, if you're the type of investor who prefers buying stocks without the burden of debt, then don't hesitate to discover our exclusive list of net cash growth stocks, today.

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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