Legendary fund manager Li Lu (who Charlie Munger backed) once said, 'The biggest investment risk is not the volatility of prices, but whether you will suffer a permanent loss of capital.' So it might be obvious that you need to consider debt, when you think about how risky any given stock is, because too much debt can sink a company. As with many other companies Antares Pharma, Inc. (NASDAQ:ATRS) makes use of debt. But the real question is whether this debt is making the company risky.
When Is Debt Dangerous?
Debt and other liabilities become risky for a business when it cannot easily fulfill those obligations, either with free cash flow or by raising capital at an attractive price. Ultimately, if the company can't fulfill its legal obligations to repay debt, shareholders could walk away with nothing. 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. Having said that, the most common situation is where a company manages its debt reasonably well - and to its own advantage. The first thing to do when considering how much debt a business uses is to look at its cash and debt together.
What Is Antares Pharma's Debt?
As you can see below, Antares Pharma had US$39.5m of debt, at September 2020, which is about the same as the year before. You can click the chart for greater detail. But it also has US$52.2m in cash to offset that, meaning it has US$12.6m net cash.
A Look At Antares Pharma's Liabilities
The latest balance sheet data shows that Antares Pharma had liabilities of US$50.6m due within a year, and liabilities of US$39.8m falling due after that. Offsetting these obligations, it had cash of US$52.2m as well as receivables valued at US$51.3m due within 12 months. So it actually has US$13.1m more liquid assets than total liabilities.
This state of affairs indicates that Antares Pharma'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 US$781.7m company is struggling for cash, we still think it's worth monitoring its balance sheet. Succinctly put, Antares Pharma boasts net cash, so it's fair to say it does not have a heavy debt load!
Notably, Antares Pharma made a loss at the EBIT level, last year, but improved that to positive EBIT of US$13m in the last twelve months. There's no doubt that we learn most about debt from the balance sheet. But ultimately the future profitability of the business will decide if Antares Pharma 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.
Finally, while the tax-man may adore accounting profits, lenders only accept cold hard cash. Antares Pharma 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. In the last year, Antares Pharma's free cash flow amounted to 31% of its EBIT, less than we'd expect. That weak cash conversion makes it more difficult to handle indebtedness.
While we empathize with investors who find debt concerning, you should keep in mind that Antares Pharma has net cash of US$12.6m, as well as more liquid assets than liabilities. So we don't have any problem with Antares Pharma's use of debt. 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. Be aware that Antares Pharma is showing 3 warning signs in our investment analysis , you should know about...
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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