Does Amphastar Pharmaceuticals (NASDAQ:AMPH) Have A Healthy Balance Sheet?

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. We can see that Amphastar Pharmaceuticals, Inc. (NASDAQ:AMPH) does use debt in its business. But the real question is whether this debt is making the company risky.

When Is Debt Dangerous?

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 frequent (but still costly) occurrence is where a company must issue shares at bargain-basement prices, permanently diluting shareholders, just to shore up its balance sheet. 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.

Check out our latest analysis for Amphastar Pharmaceuticals

What Is Amphastar Pharmaceuticals's Net Debt?

As you can see below, Amphastar Pharmaceuticals had US$75.1m of debt, at September 2022, which is about the same as the year before. You can click the chart for greater detail. However, it does have US$184.1m in cash offsetting this, leading to net cash of US$109.0m.

A Look At Amphastar Pharmaceuticals' Liabilities

The latest balance sheet data shows that Amphastar Pharmaceuticals had liabilities of US$102.2m due within a year, and liabilities of US$119.3m falling due after that. On the other hand, it had cash of US$184.1m and US$88.5m worth of receivables due within a year. So it actually has US$51.0m more liquid assets than total liabilities.

This short term liquidity is a sign that Amphastar Pharmaceuticals could probably pay off its debt with ease, as its balance sheet is far from stretched. Simply put, the fact that Amphastar Pharmaceuticals has more cash than debt is arguably a good indication that it can manage its debt safely.

In addition to that, we're happy to report that Amphastar Pharmaceuticals has boosted its EBIT by 88%, thus reducing the spectre of future debt repayments. When analysing debt levels, the balance sheet is the obvious place to start. But ultimately the future profitability of the business will decide if Amphastar Pharmaceuticals can strengthen its balance sheet over time. So if you're focused on the future you can check out this free report showing analyst profit forecasts.

Finally, while the tax-man may adore accounting profits, lenders only accept cold hard cash. While Amphastar Pharmaceuticals 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, Amphastar Pharmaceuticals recorded free cash flow worth a fulsome 96% of its EBIT, which is stronger than we'd usually expect. That positions it well to pay down debt if desirable to do so.

Summing Up

While it is always sensible to investigate a company's debt, in this case Amphastar Pharmaceuticals has US$109.0m in net cash and a decent-looking balance sheet. The cherry on top was that in converted 96% of that EBIT to free cash flow, bringing in US$90m. So we don't think Amphastar Pharmaceuticals's use of debt is risky. We'd be very excited to see if Amphastar Pharmaceuticals insiders have been snapping up shares. If you are too, then click on this link right now to take a (free) peek at our list of reported insider transactions.

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.

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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.