David Iben put it well when he said, 'Volatility is not a risk we care about. What we care about is avoiding the permanent loss of capital.' So it seems the smart money knows that debt - which is usually involved in bankruptcies - is a very important factor, when you assess how risky a company is. As with many other companies Beyond Air, Inc. (NASDAQ:XAIR) makes use of 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. 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. Of course, debt can be an important tool in businesses, particularly capital heavy businesses. The first thing to do when considering how much debt a business uses is to look at its cash and debt together.
What Is Beyond Air's Net Debt?
You can click the graphic below for the historical numbers, but it shows that as of June 2020 Beyond Air had US$4.58m of debt, an increase on US$147.2k, over one year. However, it does have US$23.8m in cash offsetting this, leading to net cash of US$19.2m.
How Healthy Is Beyond Air's Balance Sheet?
According to the last reported balance sheet, Beyond Air had liabilities of US$3.94m due within 12 months, and liabilities of US$4.70m due beyond 12 months. Offsetting this, it had US$23.8m in cash and US$79.8k in receivables that were due within 12 months. So it actually has US$15.3m more liquid assets than total liabilities.
This excess liquidity suggests that Beyond Air is taking a careful approach to debt. Due to its strong net asset position, it is not likely to face issues with its lenders. Succinctly put, Beyond Air boasts net cash, so it's fair to say it does not have a heavy debt load! 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 Beyond Air'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.
In the last year Beyond Air had a loss before interest and tax, and actually shrunk its revenue by 88%, to US$992k. To be frank that doesn't bode well.
So How Risky Is Beyond Air?
We have no doubt that loss making companies are, in general, riskier than profitable ones. And the fact is that over the last twelve months Beyond Air lost money at the earnings before interest and tax (EBIT) line. And over the same period it saw negative free cash outflow of US$18m and booked a US$21m accounting loss. While this does make the company a bit risky, it's important to remember it has net cash of US$19.2m. That kitty means the company can keep spending for growth for at least two years, at current rates. Even though its balance sheet seems sufficiently liquid, debt always makes us a little nervous if a company doesn't produce free cash flow regularly. There's no doubt that we learn most about debt from the balance sheet. But ultimately, every company can contain risks that exist outside of the balance sheet. Be aware that Beyond Air is showing 3 warning signs in our investment analysis , and 2 of those shouldn't be ignored...
If, after all that, you're more interested in a fast growing company with a rock-solid balance sheet, then check out our list of net cash growth stocks without delay.
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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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