We Think Apollo Endosurgery (NASDAQ:APEN) Has A Fair Chunk Of Debt

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. We can see that Apollo Endosurgery, Inc. (NASDAQ:APEN) does use debt in its business. But should shareholders be worried about its use of debt?

When Is Debt A Problem?

Debt assists a business until the business has trouble paying it off, either with new capital or with free cash flow. Part and parcel of capitalism is the process of 'creative destruction' where failed businesses are mercilessly liquidated by their bankers. 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, plenty of companies use debt to fund growth, without any negative consequences. The first step when considering a company's debt levels is to consider its cash and debt together.

Check out our latest analysis for Apollo Endosurgery

What Is Apollo Endosurgery's Debt?

As you can see below, at the end of September 2020, Apollo Endosurgery had US$57.2m of debt, up from US$52.8m a year ago. Click the image for more detail. However, it also had US$37.4m in cash, and so its net debt is US$19.7m.

How Strong Is Apollo Endosurgery's Balance Sheet?

The latest balance sheet data shows that Apollo Endosurgery had liabilities of US$19.0m due within a year, and liabilities of US$51.2m falling due after that. On the other hand, it had cash of US$37.4m and US$8.22m worth of receivables due within a year. So its liabilities total US$24.6m more than the combination of its cash and short-term receivables.

While this might seem like a lot, it is not so bad since Apollo Endosurgery has a market capitalization of US$107.5m, and so it could probably strengthen its balance sheet by raising capital if it needed to. But it's clear that we should definitely closely examine whether it can manage its debt without dilution. 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 Apollo Endosurgery'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.

Over 12 months, Apollo Endosurgery made a loss at the EBIT level, and saw its revenue drop to US$41m, which is a fall of 24%. To be frank that doesn't bode well.

Caveat Emptor

Not only did Apollo Endosurgery's revenue slip over the last twelve months, but it also produced negative earnings before interest and tax (EBIT). Its EBIT loss was a whopping US$19m. Considering that alongside the liabilities mentioned above does not give us much confidence that company should be using so much debt. So we think its balance sheet is a little strained, though not beyond repair. Another cause for caution is that is bled US$26m in negative free cash flow over the last twelve months. So suffice it to say we consider the stock very risky. 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 3 warning signs for Apollo Endosurgery 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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