We Think Amphastar Pharmaceuticals (NASDAQ:AMPH) Can Manage Its Debt With Ease

Some say volatility, rather than debt, is the best way to think about risk as an investor, but Warren Buffett famously said that '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. Importantly, Amphastar Pharmaceuticals, Inc. (NASDAQ:AMPH) does carry debt. But the more important question is: how much risk is that debt creating?

When Is Debt A Problem?

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. Part and parcel of capitalism is the process of 'creative destruction' where failed businesses are mercilessly liquidated by their bankers. 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, plenty of companies use debt to fund growth, without any negative consequences. The first thing to do when considering how much debt a business uses is to look at its cash and debt together.

See our latest analysis for Amphastar Pharmaceuticals

What Is Amphastar Pharmaceuticals's Debt?

The chart below, which you can click on for greater detail, shows that Amphastar Pharmaceuticals had US$75.0m in debt in March 2023; about the same as the year before. However, it does have US$192.9m in cash offsetting this, leading to net cash of US$117.9m.

How Strong Is Amphastar Pharmaceuticals' Balance Sheet?

According to the last reported balance sheet, Amphastar Pharmaceuticals had liabilities of US$105.6m due within 12 months, and liabilities of US$119.4m due beyond 12 months. Offsetting this, it had US$192.9m in cash and US$101.4m in receivables that were due within 12 months. So it can boast US$69.2m 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 44%, thus reducing the spectre of future debt repayments. When analysing debt levels, the balance sheet is the obvious place to start. But it is future earnings, more than anything, that will determine Amphastar Pharmaceuticals'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.

Finally, a company can only pay off debt with cold hard cash, not accounting profits. 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 90% 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 we empathize with investors who find debt concerning, you should keep in mind that Amphastar Pharmaceuticals has net cash of US$117.9m, as well as more liquid assets than liabilities. The cherry on top was that in converted 90% of that EBIT to free cash flow, bringing in US$51m. 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.

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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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.