Biotage (STO:BIOT) Has A Rock Solid Balance Sheet

Legendary fund manager Li Lu (who Charlie Munger backed) once said, 'The biggest investment risk is not the volatility of prices, but whether you will suffer a permanent loss of capital.' It's only natural to consider a company's balance sheet when you examine how risky it is, since debt is often involved when a business collapses. Importantly, Biotage AB (publ) (STO:BIOT) does carry debt. But the more important question is: how much risk is that debt creating?

When Is Debt Dangerous?

Debt assists a business until the business has trouble paying it off, either with new capital or with free cash flow. 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. By replacing dilution, though, debt can be an extremely good tool for businesses that need capital to invest in growth at high rates of return. When we examine debt levels, we first consider both cash and debt levels, together.

See our latest analysis for Biotage

How Much Debt Does Biotage Carry?

The image below, which you can click on for greater detail, shows that Biotage had debt of kr45.9m at the end of June 2021, a reduction from kr109.6m over a year. But on the other hand it also has kr278.6m in cash, leading to a kr232.6m net cash position.

How Healthy Is Biotage's Balance Sheet?

The latest balance sheet data shows that Biotage had liabilities of kr263.7m due within a year, and liabilities of kr126.4m falling due after that. Offsetting these obligations, it had cash of kr278.6m as well as receivables valued at kr221.4m due within 12 months. So it actually has kr109.8m more liquid assets than total liabilities.

Having regard to Biotage's size, it seems that its liquid assets are well balanced with its total liabilities. So it's very unlikely that the kr16.6b company is short on cash, but still worth keeping an eye on the balance sheet. Succinctly put, Biotage boasts net cash, so it's fair to say it does not have a heavy debt load!

Also positive, Biotage grew its EBIT by 26% in the last year, and that should make it easier to pay down debt, going forward. The balance sheet is clearly the area to focus on when you are analysing debt. But it is future earnings, more than anything, that will determine Biotage'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.

But our final consideration is also important, because a company cannot pay debt with paper profits; it needs cold hard cash. Biotage may have net cash on the balance sheet, but it is still interesting to look at how well the business converts its earnings before interest and tax (EBIT) to free cash flow, because that will influence both its need for, and its capacity to manage debt. Over the last three years, Biotage recorded free cash flow worth a fulsome 96% of its EBIT, which is stronger than we'd usually expect. That positions it well to pay down debt if desirable to do so.

Summing up

While we empathize with investors who find debt concerning, you should keep in mind that Biotage has net cash of kr232.6m, as well as more liquid assets than liabilities. And it impressed us with free cash flow of kr256m, being 96% of its EBIT. So is Biotage's debt a risk? It doesn't seem so to us. The balance sheet is clearly the area to focus on when you are analysing debt. But ultimately, every company can contain risks that exist outside of the balance sheet. For example, we've discovered 1 warning sign for Biotage that you should be aware of before investing here.

At the end of the day, it's often better to focus on companies that are free from net debt. You can access our special list of such companies (all with a track record of profit growth). It's free.

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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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