Warren Buffett famously said, '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 Biotage AB (publ) (STO:BIOT) does have debt on its balance sheet. But the real question is whether this debt is making the company risky.
When Is Debt A Problem?
Debt is a tool to help businesses grow, but if a business is incapable of paying off its lenders, then it exists at their mercy. Ultimately, if the company can't fulfill its legal obligations to repay debt, shareholders could walk away with nothing. 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. 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. The first thing to do when considering how much debt a business uses is to look at its cash and debt together.
What Is Biotage's Net Debt?
The image below, which you can click on for greater detail, shows that at December 2021 Biotage had debt of kr195.0m, up from kr110.0m in one year. But it also has kr311.0m in cash to offset that, meaning it has kr116.0m net cash.
A Look At Biotage's Liabilities
Zooming in on the latest balance sheet data, we can see that Biotage had liabilities of kr313.0m due within 12 months and liabilities of kr308.0m due beyond that. Offsetting this, it had kr311.0m in cash and kr226.0m in receivables that were due within 12 months. So it has liabilities totalling kr84.0m more than its cash and near-term receivables, combined.
Having regard to Biotage's size, it seems that its liquid assets are well balanced with its total liabilities. So while it's hard to imagine that the kr12.5b company is struggling for cash, we still think it's worth monitoring its balance sheet. While it does have liabilities worth noting, Biotage also has more cash than debt, so we're pretty confident it can manage its debt safely.
In addition to that, we're happy to report that Biotage has boosted its EBIT by 41%, thus reducing the spectre of future debt repayments. 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 want to see what the professionals think, you might find this free report on analyst profit forecasts to be interesting.
Finally, while the tax-man may adore accounting profits, lenders only accept cold hard cash. 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. Over the last three years, Biotage actually produced more free cash flow than EBIT. That sort of strong cash conversion gets us as excited as the crowd when the beat drops at a Daft Punk concert.
We could understand if investors are concerned about Biotage's liabilities, but we can be reassured by the fact it has has net cash of kr116.0m. The cherry on top was that in converted 103% of that EBIT to free cash flow, bringing in kr297m. So is Biotage's debt a risk? It doesn't seem so to us. 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. These risks can be hard to spot. Every company has them, and we've spotted 1 warning sign for Biotage you should know about.
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.
Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team (at) simplywallst.com.
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.