ADC Therapeutics (NYSE:ADCT) Has Debt But No Earnings; Should You Worry?

Warren Buffett famously said, 'Volatility is far from synonymous with risk.' 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. We can see that ADC Therapeutics SA (NYSE:ADCT) does use debt in its business. But the more important question is: how much risk is that debt creating?

What Risk Does Debt Bring?

Debt and other liabilities become risky for a business when it cannot easily fulfill those obligations, either with free cash flow or by raising capital at an attractive price. 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. Having said that, the most common situation is where a company manages its debt reasonably well - and to its own advantage. When we examine debt levels, we first consider both cash and debt levels, together.

See our latest analysis for ADC Therapeutics

How Much Debt Does ADC Therapeutics Carry?

As you can see below, at the end of March 2022, ADC Therapeutics had US$307.1m of debt, up from US$39.4m a year ago. Click the image for more detail. But on the other hand it also has US$430.9m in cash, leading to a US$123.8m net cash position.

A Look At ADC Therapeutics' Liabilities

The latest balance sheet data shows that ADC Therapeutics had liabilities of US$70.8m due within a year, and liabilities of US$348.4m falling due after that. Offsetting these obligations, it had cash of US$430.9m as well as receivables valued at US$26.8m due within 12 months. So it actually has US$38.4m more liquid assets than total liabilities.

This surplus suggests that ADC Therapeutics has a conservative balance sheet, and could probably eliminate its debt without much difficulty. Succinctly put, ADC 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 ADC Therapeutics's ability to maintain a healthy balance sheet going forward. So if you're focused on the future you can check out this free report showing analyst profit forecasts.

In the last year ADC Therapeutics managed to produce its first revenue as a listed company, but given the lack of profit, shareholders will no doubt be hoping to see some strong increases.

So How Risky Is ADC Therapeutics?

Statistically speaking companies that lose money are riskier than those that make money. And the fact is that over the last twelve months ADC Therapeutics lost money at the earnings before interest and tax (EBIT) line. And over the same period it saw negative free cash outflow of US$219m and booked a US$195m accounting loss. Given it only has net cash of US$123.8m, the company may need to raise more capital if it doesn't reach break-even soon. 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. When analysing debt levels, the balance sheet is the obvious place to start. However, not all investment risk resides within the balance sheet - far from it. To that end, you should be aware of the 2 warning signs we've spotted with ADC Therapeutics .

When all is said and done, sometimes its easier to focus on companies that don't even need debt. Readers can access a list of growth stocks with zero net debt 100% free, right now.

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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.

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