These 4 Measures Indicate That Biotage (STO:BIOT) Is Using Debt Safely

The external fund manager backed by Berkshire Hathaway's Charlie Munger, Li Lu, makes no bones about it when he says 'The biggest investment risk is not the volatility of prices, but whether you will suffer a permanent loss of capital.' When we think about how risky a company is, we always like to look at its use of debt, since debt overload can lead to ruin. We note that Biotage AB (publ) (STO:BIOT) does have debt on its balance sheet. But is this debt a concern to shareholders?

What Risk Does Debt Bring?

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. 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.

Check out our latest analysis for Biotage

How Much Debt Does Biotage Carry?

As you can see below, at the end of December 2022, Biotage had kr167.0m of debt, up from kr150.0m a year ago. Click the image for more detail. However, its balance sheet shows it holds kr441.0m in cash, so it actually has kr274.0m net cash.

How Healthy Is Biotage's Balance Sheet?

The latest balance sheet data shows that Biotage had liabilities of kr417.0m due within a year, and liabilities of kr285.0m falling due after that. Offsetting these obligations, it had cash of kr441.0m as well as receivables valued at kr285.0m due within 12 months. So it actually has kr24.0m 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 kr9.20b 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.

And we also note warmly that Biotage grew its EBIT by 16% last year, making its debt load easier to handle. The balance sheet is clearly the area to focus on when you are analysing debt. But ultimately the future profitability of the business will decide if Biotage can strengthen its balance sheet over time. So if you're focused on the future you can check out this free report showing analyst profit forecasts.

Finally, while the tax-man may adore accounting profits, lenders only accept 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. Happily for any shareholders, Biotage actually produced more free cash flow than EBIT over the last three years. That sort of strong cash conversion gets us as excited as the crowd when the beat drops at a Daft Punk concert.

Summing Up

While it is always sensible to investigate a company's debt, in this case Biotage has kr274.0m in net cash and a decent-looking balance sheet. The cherry on top was that in converted 103% of that EBIT to free cash flow, bringing in kr271m. So is Biotage's debt a risk? It doesn't seem so to us. Over time, share prices tend to follow earnings per share, so if you're interested in Biotage, you may well want to click here to check an interactive graph of its earnings per share history.

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. 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.