Stock Analysis

Panion & Bf Biotech (TPE:1760) Has A Somewhat Strained Balance Sheet

TWSE:1760
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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.' 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, Panion & Bf Biotech Inc. (TPE:1760) does carry debt. But is this debt a concern to shareholders?

When Is Debt Dangerous?

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. 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. Of course, plenty of companies use debt to fund growth, without any negative consequences. The first thing to do when considering how much debt a business uses is to look at its cash and debt together.

Check out our latest analysis for Panion & Bf Biotech

What Is Panion & Bf Biotech's Net Debt?

You can click the graphic below for the historical numbers, but it shows that as of September 2020 Panion & Bf Biotech had NT$160.0m of debt, an increase on none, over one year. However, its balance sheet shows it holds NT$377.0m in cash, so it actually has NT$217.0m net cash.

debt-equity-history-analysis
TSEC:1760 Debt to Equity History December 15th 2020

How Healthy Is Panion & Bf Biotech's Balance Sheet?

We can see from the most recent balance sheet that Panion & Bf Biotech had liabilities of NT$550.9m falling due within a year, and liabilities of NT$137.7m due beyond that. Offsetting this, it had NT$377.0m in cash and NT$316.3m in receivables that were due within 12 months. So these liquid assets roughly match the total liabilities.

This state of affairs indicates that Panion & Bf Biotech'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 NT$6.56b company is struggling for cash, we still think it's worth monitoring its balance sheet. Succinctly put, Panion & Bf Biotech boasts net cash, so it's fair to say it does not have a heavy debt load!

It is just as well that Panion & Bf Biotech's load is not too heavy, because its EBIT was down 50% over the last year. When a company sees its earnings tank, it can sometimes find its relationships with its lenders turn sour. 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 Panion & Bf Biotech can strengthen its balance sheet over time. So if you want to see what the professionals think, you might find this free report on analyst profit forecasts to be interesting.

But our final consideration is also important, because a company cannot pay debt with paper profits; it needs cold hard cash. Panion & Bf Biotech 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. Considering the last three years, Panion & Bf Biotech actually recorded a cash outflow, overall. Debt is far more risky for companies with unreliable free cash flow, so shareholders should be hoping that the past expenditure will produce free cash flow in the future.

Summing up

While we empathize with investors who find debt concerning, you should keep in mind that Panion & Bf Biotech has net cash of NT$217.0m, as well as more liquid assets than liabilities. So while Panion & Bf Biotech does not have a great balance sheet, it's certainly not too bad. 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. To that end, you should be aware of the 3 warning signs we've spotted with Panion & Bf Biotech .

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. 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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