Biotage (STO:BIOT) Seems To Use Debt Rather Sparingly

David Iben put it well when he said, 'Volatility is not a risk we care about. What we care about is avoiding the permanent loss of capital.' 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. As with many other companies Biotage AB (STO:BIOT) makes use of debt. But is this debt a concern to shareholders?

Why Does Debt Bring Risk?

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. Part and parcel of capitalism is the process of 'creative destruction' where failed businesses are mercilessly liquidated by their bankers. However, a more common (but still painful) scenario is that it has to raise new equity capital at a low price, thus permanently diluting shareholders. Having said that, the most common situation is where a company manages its debt reasonably well - and to its own advantage. The first step when considering a company's debt levels is to consider its cash and debt together.

See our latest analysis for Biotage

What Is Biotage's Debt?

As you can see below, Biotage had kr110.0m of debt, at December 2020, which is about the same as the year before. You can click the chart for greater detail. But it also has kr371.3m in cash to offset that, meaning it has kr261.3m net cash.

How Strong Is Biotage's Balance Sheet?

We can see from the most recent balance sheet that Biotage had liabilities of kr217.4m falling due within a year, and liabilities of kr227.0m due beyond that. Offsetting these obligations, it had cash of kr371.3m as well as receivables valued at kr220.5m due within 12 months. So it actually has kr147.4m more liquid assets than total liabilities.

This state of affairs indicates that Biotage's balance sheet looks quite solid, as its total liabilities are just about equal to its liquid assets. So while it's hard to imagine that the kr9.32b company is struggling for cash, we still think it's worth monitoring its balance sheet. Simply put, the fact that Biotage has more cash than debt is arguably a good indication that it can manage its debt safely.

Fortunately, Biotage grew its EBIT by 3.3% in the last year, making that debt load look even more manageable. 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.

Finally, a business needs free cash flow to pay off debt; accounting profits just don't cut it. While Biotage has net cash on its balance sheet, it's still worth taking a look at its ability to convert earnings before interest and tax (EBIT) to free cash flow, to help us understand how quickly it is building (or eroding) that cash balance. During the last three years, Biotage generated free cash flow amounting to a very robust 83% of its EBIT, more than we'd expect. That positions it well to pay down debt if desirable to do so.

Summing up

While it is always sensible to investigate a company's debt, in this case Biotage has kr261.3m in net cash and a decent-looking balance sheet. And it impressed us with free cash flow of kr218m, being 83% of its EBIT. So we don't think Biotage's use of debt is risky. Another factor that would give us confidence in Biotage would be if insiders have been buying shares: if you're conscious of that signal too, you can find out instantly by clicking this link.

If you're interested in investing in businesses that can grow profits without the burden of debt, then check out this free list of growing businesses that have net cash on the balance sheet.

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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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