Warren Buffett famously said, 'Volatility is far from synonymous with risk.' 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. Importantly, Panion & Bf Biotech Inc. (TWSE:1760) does carry debt. But should shareholders be worried about its use of debt?
Why Does Debt Bring Risk?
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. 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. 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. The first step when considering a company's debt levels is to consider its cash and debt together.
Check out our latest analysis for Panion & Bf Biotech
How Much Debt Does Panion & Bf Biotech Carry?
As you can see below, at the end of March 2024, Panion & Bf Biotech had NT$670.2m of debt, up from NT$432.3m a year ago. Click the image for more detail. However, it does have NT$476.2m in cash offsetting this, leading to net debt of about NT$194.0m.
How Strong Is Panion & Bf Biotech's Balance Sheet?
We can see from the most recent balance sheet that Panion & Bf Biotech had liabilities of NT$1.09b falling due within a year, and liabilities of NT$256.2m due beyond that. Offsetting this, it had NT$476.2m in cash and NT$347.9m in receivables that were due within 12 months. So its liabilities total NT$520.7m more than the combination of its cash and short-term receivables.
Given Panion & Bf Biotech has a market capitalization of NT$7.89b, it's hard to believe these liabilities pose much threat. Having said that, it's clear that we should continue to monitor its balance sheet, lest it change for the worse.
In order to size up a company's debt relative to its earnings, we calculate its net debt divided by its earnings before interest, tax, depreciation, and amortization (EBITDA) and its earnings before interest and tax (EBIT) divided by its interest expense (its interest cover). This way, we consider both the absolute quantum of the debt, as well as the interest rates paid on it.
Panion & Bf Biotech has a low net debt to EBITDA ratio of only 0.56. And its EBIT covers its interest expense a whopping 159 times over. So you could argue it is no more threatened by its debt than an elephant is by a mouse. The modesty of its debt load may become crucial for Panion & Bf Biotech if management cannot prevent a repeat of the 47% cut to EBIT over the last year. When a company sees its earnings tank, it can sometimes find its relationships with its lenders turn sour. When analysing debt levels, the balance sheet is the obvious place to start. But it is future earnings, more than anything, that will determine Panion & Bf Biotech'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 company can only pay off debt with cold hard cash, not accounting profits. So it's worth checking how much of that EBIT is backed by free cash flow. Over the most recent three years, Panion & Bf Biotech recorded free cash flow worth 62% of its EBIT, which is around normal, given free cash flow excludes interest and tax. This cold hard cash means it can reduce its debt when it wants to.
Our View
Panion & Bf Biotech's EBIT growth rate was a real negative on this analysis, although the other factors we considered were considerably better. In particular, we are dazzled with its interest cover. Considering this range of data points, we think Panion & Bf Biotech is in a good position to manage its debt levels. But a word of caution: we think debt levels are high enough to justify ongoing monitoring. There's no doubt that we learn most about debt from the balance sheet. However, not all investment risk resides within the balance sheet - far from it. For instance, we've identified 1 warning sign for Panion & Bf Biotech that you should be aware of.
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.
About TWSE:1760
Panion & Bf Biotech
A biotechnology pharmaceutical company, provides western medicines, cosmetics, and health care products in Taiwan, the United States, China, Hong Kong, and internationally.
Excellent balance sheet second-rate dividend payer.
