Does Aytu BioPharma (NASDAQ:AYTU) Have A Healthy Balance Sheet?

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 Aytu BioPharma, Inc. (NASDAQ:AYTU) makes use of debt. But the more important question is: how much risk is that debt creating?

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. Ultimately, if the company can't fulfill its legal obligations to repay debt, shareholders could walk away with nothing. 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, 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.

See our latest analysis for Aytu BioPharma

What Is Aytu BioPharma's Net Debt?

As you can see below, Aytu BioPharma had US$16.0m of debt at September 2023, down from US$22.4m a year prior. But on the other hand it also has US$20.0m in cash, leading to a US$3.97m net cash position.

How Strong Is Aytu BioPharma's Balance Sheet?

According to the last reported balance sheet, Aytu BioPharma had liabilities of US$65.5m due within 12 months, and liabilities of US$35.3m due beyond 12 months. On the other hand, it had cash of US$20.0m and US$29.9m worth of receivables due within a year. So its liabilities total US$50.9m more than the combination of its cash and short-term receivables.

This deficit casts a shadow over the US$15.7m company, like a colossus towering over mere mortals. So we'd watch its balance sheet closely, without a doubt. After all, Aytu BioPharma would likely require a major re-capitalisation if it had to pay its creditors today. Given that Aytu BioPharma has more cash than debt, we're pretty confident it can handle its debt, despite the fact that it has a lot of liabilities in total. When analysing debt levels, the balance sheet is the obvious place to start. But it is future earnings, more than anything, that will determine Aytu BioPharma's ability to maintain a healthy balance sheet going forward. 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, Aytu BioPharma saw its revenue hold pretty steady, and it did not report positive earnings before interest and tax. While that's not too bad, we'd prefer see growth.

So How Risky Is Aytu BioPharma?

While Aytu BioPharma lost money on an earnings before interest and tax (EBIT) level, it actually generated positive free cash flow US$3.8m. So although it is loss-making, it doesn't seem to have too much near-term balance sheet risk, keeping in mind the net cash. We're not impressed by its revenue growth, so until we see some positive sustainable EBIT, we consider the stock to be high risk. The balance sheet is clearly the area to focus on when you are analysing debt. However, not all investment risk resides within the balance sheet - far from it. Case in point: We've spotted 3 warning signs for Aytu BioPharma you should be aware of, and 1 of them doesn't sit too well with us.

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.