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.' It's only natural to consider a company's balance sheet when you examine how risky it is, since debt is often involved when a business collapses. As with many other companies Antares Pharma, Inc. (NASDAQ:ATRS) makes use of debt. But the more important question is: how much risk is that debt creating?
Why Does Debt Bring Risk?
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. While that is not too common, we often do see indebted companies permanently diluting shareholders because lenders force them to raise capital at a distressed price. Of course, plenty of companies use debt to fund growth, without any negative consequences. The first step when considering a company's debt levels is to consider its cash and debt together.
What Is Antares Pharma's Debt?
As you can see below, Antares Pharma had US$41.0m of debt, at March 2021, which is about the same as the year before. You can click the chart for greater detail. However, its balance sheet shows it holds US$55.7m in cash, so it actually has US$14.6m net cash.
A Look At Antares Pharma's Liabilities
According to the last reported balance sheet, Antares Pharma had liabilities of US$72.1m due within 12 months, and liabilities of US$20.1m due beyond 12 months. Offsetting these obligations, it had cash of US$55.7m as well as receivables valued at US$53.9m due within 12 months. So it actually has US$17.3m more liquid assets than total liabilities.
This surplus suggests that Antares Pharma has a conservative balance sheet, and could probably eliminate its debt without much difficulty. Succinctly put, Antares Pharma boasts net cash, so it's fair to say it does not have a heavy debt load!
Pleasingly, Antares Pharma is growing its EBIT faster than former Australian PM Bob Hawke downs a yard glass, boasting a 343% gain 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. While Antares Pharma 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. In the last two years, Antares Pharma's free cash flow amounted to 28% of its EBIT, less than we'd expect. That's not great, when it comes to paying down debt.
While it is always sensible to investigate a company's debt, in this case Antares Pharma has US$14.6m in net cash and a decent-looking balance sheet. And we liked the look of last year's 343% year-on-year EBIT growth. So we are not troubled with Antares Pharma's debt use. 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. We've identified 1 warning sign with Antares Pharma , and understanding them should be part of your investment process.
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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