David Iben put it well when he said: “Volatility is not a risk we care about. What matters to us is to avoid the permanent loss of capital. ‘ So it seems like smart money knows that debt – which is usually involved in bankruptcies – is a very important factor, when you assess the level of risk of a business. We can see that Arvinas, Inc. (NASDAQ: ARVN) uses debt in its business. But should shareholders be concerned about its use of debt?
What risk does debt entail?
Debts and other liabilities become risky for a business when it cannot easily meet these obligations, either with free cash flow or by raising capital at an attractive price. An integral part of capitalism is the process of “creative destruction” where bankrupt companies are ruthlessly liquidated by their bankers. While it’s not too common, we often see indebted companies continually diluting their shareholders because lenders are forcing them to raise capital at a ridiculous price. By replacing dilution, however, debt can be a very good tool for companies that need capital to invest in growth at high rates of return. The first step in examining a company’s debt levels is to consider its cash flow and debt together.
Discover our latest analysis for Arvinas
What is Arvinas’ debt?
As you can see below, Arvinas was in debt of US $ 2.00 million, as of March 2021, which is roughly the same as the year before. You can click on the graph for more details. But it also has $ 651.3 million in cash to make up for that, which means it has $ 649.3 million in net cash.
A look at Arvinas’ responsibilities
Zooming in on the latest balance sheet data, we can see that Arvinas had a liability of US $ 40.4 million due within 12 months and a liability of US $ 26.1 million beyond. In compensation for these obligations, it had cash of US $ 651.3 million as well as receivables valued at US $ 5.18 million due within 12 months. So he actually has $ 590.0 million After liquid assets as total liabilities.
This surplus suggests that Arvinas is using the debt in a way that seems both safe and prudent. Because he has a lot of assets, he is unlikely to have any problems with his lenders. Put simply, the fact that Arvinas has more cash than debt is arguably a good indication that she can handle her debt safely. There is no doubt that we learn the most about debt from the balance sheet. But ultimately, the company’s future profitability will decide whether Arvinas can strengthen its balance sheet over time. So, if you want to see what the professionals think, you might find this free analyst earnings forecast report interesting.
Over 12 months, Arvinas recorded a loss in EBIT and saw sales fall to US $ 21 million, a decrease of 53%. To be frank, that doesn’t bode well.
So how risky is Arvinas?
By their very nature, businesses that lose money are riskier than those with a long history of profitability. And the point is that over the past twelve months Arvinas has lost money in earnings before interest and taxes (EBIT). And during the same period, it recorded negative free cash outflows of US $ 118 million and a book loss of US $ 139 million. While this does make the business a bit risky, it’s important to remember that it has a net cash flow of $ 649.3 million. This jackpot means the business can continue to spend on growth for at least two years, at current rates. Even if its balance sheet seems sufficiently liquid, debt always makes us a little nervous if a company does not produce regular free cash flow. When analyzing debt levels, the balance sheet is the obvious starting point. But at the end of the day, every business can contain risks that exist off the balance sheet. Concrete example: we have spotted 2 warning signs for Arvinas you must be aware.
At the end of the day, it’s often best to focus on businesses with no net debt. You can access our special list of these companies (all with a history of profit growth). It’s free.
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