We think Idorsia (VTX:IDIA) has a good chunk of debt
Legendary fund manager Li Lu (whom Charlie Munger once backed) once said, “The greatest risk in investing is not price volatility, but whether you will suffer a permanent loss of capital. So it seems smart money knows that debt – which is usually involved in bankruptcies – is a very important factor when you’re assessing a company’s risk. Above all, Idorsia Ltd (VTX:IDIA) is in debt. But should shareholders worry about its use of debt?
Why is debt risky?
Generally speaking, debt only becomes a real problem when a company cannot easily repay it, either by raising capital or with its own cash flow. An integral part of capitalism is the process of “creative destruction” where bankrupt companies are mercilessly liquidated by their bankers. However, a more common (but still costly) situation is when a company has to dilute shareholders at a cheap share price just to keep debt under control. By replacing dilution, however, debt can be a great tool for companies that need capital to invest in growth at high rates of return. The first thing to do when considering how much debt a business has is to look at its cash and debt together.
See our latest analysis for Idorsia
What is Idorsia’s net debt?
You can click on the graph below for historical figures, but it shows that in December 2021, Idorsia had a debt of 1.09 billion francs, an increase from 587.4 million francs, on a year. However, since it has a cash reserve of 1.04 billion francs, its net debt is less, at around 54.5 million francs.
How strong is Idorsia’s balance sheet?
According to the last published balance sheet, Idorsia had liabilities of CHF 165.1 million maturing within 12 months and liabilities of CHF 1.21 billion maturing beyond 12 months. On the other hand, it had 1.04 billion francs in cash and 4.61 million francs in receivables at less than one year. It therefore has liabilities totaling 336.0 million francs more than its cash and short-term receivables, combined.
Given that Idorsia has a market capitalization of 3.28 billion francs, it is difficult to believe that these liabilities pose a threat. But there are enough liabilities that we certainly recommend that shareholders continue to monitor the balance sheet in the future. The balance sheet is clearly the area to focus on when analyzing debt. But ultimately, the company’s future profitability will decide whether Idorsia can strengthen its balance sheet over time. So if you are focused on the future, you can check out this free report showing analyst earnings forecast.
Last year, Idorsia recorded a loss before interest and taxes and actually reduced its income by 51%, to 35 million francs. It makes us nervous, to say the least.
While Idorsia’s declining revenue is about as comforting as a wet blanket, it’s safe to say that its earnings before interest and tax (EBIT) loss is even less appealing. Its EBIT loss was 610 million Swiss francs. When we look at this and recall the liabilities on its balance sheet, versus cash, it seems unwise to us that the company has debt. Quite frankly, we think the track record falls short, although it could improve over time. Another reason for caution is that it has lost 621 million francs in negative free cash flow over the past twelve months. In short, it’s a really risky title. The balance sheet is clearly the area to focus on when analyzing debt. However, not all investment risks reside on the balance sheet, far from it. These risks can be difficult to spot. Every business has them, and we’ve spotted 2 warning signs for Idorsia you should know.
If you are interested in investing in businesses that can generate profits without the burden of debt, then check out this free list of growing companies that have net cash on the balance sheet.
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This Simply Wall St article is general in nature. We provide commentary based on historical data and analyst forecasts only using unbiased methodology and our articles are not intended to be financial advice. It is not a recommendation to buy or sell stocks and does not take into account your objectives or financial situation. Our goal is to bring you targeted long-term analysis based on fundamental data. Note that our analysis may not take into account the latest announcements from price-sensitive companies or qualitative materials. Simply Wall St has no position in the stocks mentioned.