We Think ANI Pharmaceuticals (NASDAQ:ANIP) Has A Fair Chunk Of Debt

The external fund manager backed by Berkshire Hathaway's Charlie Munger, Li Lu, makes no bones about it when he says 'The biggest investment risk is not the volatility of prices, but whether you will suffer a permanent loss of capital.' 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. As with many other companies ANI Pharmaceuticals, Inc. (NASDAQ:ANIP) makes use of debt. But the real question is whether this debt is making the company risky.

What Risk Does Debt Bring?

Generally speaking, debt only becomes a real problem when a company can't easily pay it off, either by raising capital or with its own cash flow. In the worst case scenario, a company can go bankrupt if it cannot pay its creditors. 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, 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 examine debt levels, we first consider both cash and debt levels, together.

Our analysis indicates that ANIP is potentially undervalued!

How Much Debt Does ANI Pharmaceuticals Carry?

As you can see below, at the end of June 2022, ANI Pharmaceuticals had US$286.9m of debt, up from US$213.7m a year ago. Click the image for more detail. On the flip side, it has US$63.4m in cash leading to net debt of about US$223.6m.

How Strong Is ANI Pharmaceuticals' Balance Sheet?

We can see from the most recent balance sheet that ANI Pharmaceuticals had liabilities of US$96.3m falling due within a year, and liabilities of US$318.1m due beyond that. On the other hand, it had cash of US$63.4m and US$150.4m worth of receivables due within a year. So it has liabilities totalling US$200.6m more than its cash and near-term receivables, combined.

While this might seem like a lot, it is not so bad since ANI Pharmaceuticals has a market capitalization of US$615.0m, 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. 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 ANI Pharmaceuticals 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.

Over 12 months, ANI Pharmaceuticals reported revenue of US$251m, which is a gain of 18%, although it did not report any earnings before interest and tax. We usually like to see faster growth from unprofitable companies, but each to their own.

Caveat Emptor

Over the last twelve months ANI Pharmaceuticals produced an earnings before interest and tax (EBIT) loss. To be specific the EBIT loss came in at US$39m. Considering that alongside the liabilities mentioned above does not give us much confidence that company should be using so much debt. Quite frankly we think the balance sheet is far from match-fit, although it could be improved with time. However, it doesn't help that it burned through US$52m of cash over the last year. So in short it's a really risky stock. 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 example, we've discovered 2 warning signs for ANI Pharmaceuticals that you should be aware of before investing here.

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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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.