Stock Analysis
Howard Marks put it nicely when he said that, rather than worrying about share price volatility, 'The possibility of permanent loss is the risk I worry about... and every practical investor I know worries about.' 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, Abiomed, Inc. (NASDAQ:ABMD) does carry debt. But is this debt a concern to shareholders?
When Is Debt Dangerous?
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. If things get really bad, the lenders can take control of the business. However, a more usual (but still expensive) situation is where a company must dilute shareholders at a cheap share price simply to get debt under control. 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 think about a company's use of debt, we first look at cash and debt together.
View our latest analysis for Abiomed
How Much Debt Does Abiomed Carry?
As you can see below, at the end of December 2021, Abiomed had US$2.13m of debt, up from none a year ago. Click the image for more detail. However, it does have US$669.2m in cash offsetting this, leading to net cash of US$667.1m.
A Look At Abiomed's Liabilities
We can see from the most recent balance sheet that Abiomed had liabilities of US$126.8m falling due within a year, and liabilities of US$33.1m due beyond that. Offsetting this, it had US$669.2m in cash and US$89.0m in receivables that were due within 12 months. So it can boast US$598.2m more liquid assets than total liabilities.
This surplus suggests that Abiomed has a conservative balance sheet, and could probably eliminate its debt without much difficulty. Succinctly put, Abiomed boasts net cash, so it's fair to say it does not have a heavy debt load!
Also good is that Abiomed grew its EBIT at 12% over the last year, further increasing its ability to manage debt. 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 Abiomed'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.
But our final consideration is also important, because a company cannot pay debt with paper profits; it needs cold hard cash. While Abiomed 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, Abiomed actually produced more free cash flow than EBIT. That sort of strong cash generation warms our hearts like a puppy in a bumblebee suit.
Summing up
While it is always sensible to investigate a company's debt, in this case Abiomed has US$667.1m in net cash and a decent-looking balance sheet. The cherry on top was that in converted 100% of that EBIT to free cash flow, bringing in US$246m. So is Abiomed's debt a risk? It doesn't seem so to us. When analysing debt levels, the balance sheet is the obvious place to start. But ultimately, every company can contain risks that exist outside of the balance sheet. These risks can be hard to spot. Every company has them, and we've spotted 3 warning signs for Abiomed you should know about.
Of course, if you're the type of investor who prefers buying stocks without the burden of debt, then don't hesitate to discover our exclusive list of net cash growth stocks, today.
What are the risks and opportunities for Abiomed?
Abiomed, Inc. engages in the research, development, and sale of medical devices to assist or replace the pumping function of the failing heart.
Rewards
Revenue is forecast to grow 13.08% per year
Earnings grew by 78.9% over the past year
Risks
Earnings are forecast to decline by an average of 2.5% per year for the next 3 years
Large one-off items impacting financial results
Volatile share price over the past 3 months
Further research on
Abiomed
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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 NasdaqGS:ABMD
Abiomed
Abiomed, Inc. engages in the research, development, and sale of medical devices to assist or replace the pumping function of the failing heart.
Flawless balance sheet with proven track record.
