Here's Why Aytu BioPharma (NASDAQ:AYTU) Has A Meaningful Debt Burden

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.' So it might be obvious that you need to consider debt, when you think about how risky any given stock is, because too much debt can sink a company. Importantly, Aytu BioPharma, Inc. (NASDAQ:AYTU) does carry debt. But should shareholders be worried about its use of debt?

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. If things get really bad, the lenders can take control of the business. 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, plenty of companies use debt to fund growth, without any negative consequences. When we examine debt levels, we first consider both cash and debt levels, together.

Check out our latest analysis for Aytu BioPharma

What Is Aytu BioPharma's Net Debt?

The image below, which you can click on for greater detail, shows that Aytu BioPharma had debt of US$16.7m at the end of March 2024, a reduction from US$21.8m over a year. But it also has US$19.8m in cash to offset that, meaning it has US$3.06m net cash.

How Strong Is Aytu BioPharma's Balance Sheet?

We can see from the most recent balance sheet that Aytu BioPharma had liabilities of US$83.7m falling due within a year, and liabilities of US$14.4m due beyond that. Offsetting these obligations, it had cash of US$19.8m as well as receivables valued at US$29.9m due within 12 months. So its liabilities total US$48.4m more than the combination of its cash and short-term receivables.

The deficiency here weighs heavily on the US$16.0m company itself, as if a child were struggling under the weight of an enormous back-pack full of books, his sports gear, and a trumpet. 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. Aytu BioPharma boasts net cash, so it's fair to say it does not have a heavy debt load, even if it does have very significant liabilities, in total.

It was also good to see that despite losing money on the EBIT line last year, Aytu BioPharma turned things around in the last 12 months, delivering and EBIT of US$1.4m. 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 Aytu BioPharma 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.

But our final consideration is also important, because a company cannot pay debt with paper profits; it needs cold hard cash. Aytu BioPharma may have net cash on the balance sheet, but it is still interesting to look at how well the business converts its earnings before interest and tax (EBIT) to free cash flow, because that will influence both its need for, and its capacity to manage debt. Over the last year, Aytu BioPharma actually produced more free cash flow than EBIT. That sort of strong cash generation warms our hearts like a puppy in a bumblebee suit.

Summing Up

While Aytu BioPharma does have more liabilities than liquid assets, it also has net cash of US$3.06m. The cherry on top was that in converted 605% of that EBIT to free cash flow, bringing in US$8.8m. So while Aytu BioPharma does not have a great balance sheet, it's certainly not too bad. 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 1 warning sign for Aytu BioPharma that you should be aware of before investing here.

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.

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