Howard Marks put it nicely when he said that, rather than worrying about share price volatility, 'The possibility of permanent loss is the risk I worry about... and every practical investor I know worries about.' 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, Acumen Pharmaceuticals, Inc. (NASDAQ:ABOS) does carry debt. But the real question is whether this debt is making the company risky.

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. In the worst case scenario, a company can go bankrupt if it cannot pay its creditors. 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. Of course, debt can be an important tool in businesses, particularly capital heavy businesses. When we think about a company's use of debt, we first look at cash and debt together.

What Is Acumen Pharmaceuticals's Debt?

The image below, which you can click on for greater detail, shows that at March 2024 Acumen Pharmaceuticals had debt of US$30.2m, up from none in one year. But on the other hand it also has US$252.5m in cash, leading to a US$222.3m net cash position.

How Strong Is Acumen Pharmaceuticals' Balance Sheet?

Zooming in on the latest balance sheet data, we can see that Acumen Pharmaceuticals had liabilities of US$8.47m due within 12 months and liabilities of US$30.5m due beyond that. On the other hand, it had cash of US$252.5m and US$189.0k worth of receivables due within a year. So it actually has US$213.8m more liquid assets than total liabilities.

This excess liquidity is a great indication that Acumen Pharmaceuticals' balance sheet is almost as strong as Fort Knox. With this in mind one could posit that its balance sheet means the company is able to handle some adversity. Simply put, the fact that Acumen Pharmaceuticals has more cash than debt is arguably a good indication that it can manage its debt safely. 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 Acumen 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.

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

So How Risky Is Acumen Pharmaceuticals?

We have no doubt that loss making companies are, in general, riskier than profitable ones. And in the last year Acumen Pharmaceuticals 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$51m and booked a US$56m accounting loss. While this does make the company a bit risky, it's important to remember it has net cash of US$222.3m. That means it could keep spending at its current rate for more than two years. 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. 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. Be aware that Acumen Pharmaceuticals is showing 5 warning signs in our investment analysis , and 2 of those are potentially serious...

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.

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.

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