Some say volatility, rather than debt, is the best way to think about risk as an investor, but Warren Buffett famously said that ‘Volatility is far from synonymous with risk.’ 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. We note that Puma Biotechnology, Inc. (NASDAQ:PBYI) does have debt on its balance sheet. But is this debt a concern to shareholders?
When Is Debt A Problem?
Generally speaking, debt only becomes a real problem when a company can’t easily pay it off, either by raising capital or with its own cash flow. In the worst case scenario, a company can go bankrupt if it cannot pay its creditors. While that is not too common, we often do see indebted companies permanently diluting shareholders because lenders force them to raise capital at a distressed price. Of course, the upside of debt is that it often represents cheap capital, especially when it replaces dilution in a company with the ability to reinvest at high rates of return. When we examine debt levels, we first consider both cash and debt levels, together.
How Much Debt Does Puma Biotechnology Carry?
The chart below, which you can click on for greater detail, shows that Puma Biotechnology had US$96.6m in debt in June 2020; about the same as the year before. But on the other hand it also has US$107.3m in cash, leading to a US$10.7m net cash position.
How Healthy Is Puma Biotechnology’s Balance Sheet?
We can see from the most recent balance sheet that Puma Biotechnology had liabilities of US$94.5m falling due within a year, and liabilities of US$145.9m due beyond that. Offsetting these obligations, it had cash of US$107.3m as well as receivables valued at US$24.0m due within 12 months. So its liabilities outweigh the sum of its cash and (near-term) receivables by US$109.2m.
While this might seem like a lot, it is not so bad since Puma Biotechnology has a market capitalization of US$418.2m, and so it could probably strengthen its balance sheet by raising capital if it needed to. But we definitely want to keep our eyes open to indications that its debt is bringing too much risk. While it does have liabilities worth noting, Puma Biotechnology also has more cash than debt, so we’re pretty confident it can manage its debt safely. When analysing debt levels, the balance sheet is the obvious place to start. But it is future earnings, more than anything, that will determine Puma Biotechnology’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 Puma Biotechnology had a loss before interest and tax, and actually shrunk its revenue by 16%, to US$241m. That’s not what we would hope to see.
So How Risky Is Puma Biotechnology?
By their very nature companies that are losing money are more risky than those with a long history of profitability. And the fact is that over the last twelve months Puma Biotechnology lost money at the earnings before interest and tax (EBIT) line. And over the same period it saw negative free cash outflow of US$11.4m and booked a US$41.6m accounting loss. With only US$10.7m on the balance sheet, it would appear that its going to need to raise capital again soon. Overall, we’d say the stock is a bit risky, and we’re usually very cautious until we see 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. For example, we’ve discovered 3 warning signs for Puma Biotechnology that you should be aware of before investing here.
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. 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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