Is Aytu Biopharma (NASDAQ:AYTU) Using Debt In A Risky Way?

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. We can see that Aytu Biopharma, Inc. (NASDAQ:AYTU) does use debt in its business. But should shareholders be worried about its use of debt?

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. 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.

View our latest analysis for Aytu Biopharma

What Is Aytu Biopharma's Net Debt?

You can click the graphic below for the historical numbers, but it shows that as of March 2021 Aytu Biopharma had US$22.1m of debt, an increase on US$3.62m, over one year. However, its balance sheet shows it holds US$46.5m in cash, so it actually has US$24.5m net cash.

A Look At Aytu Biopharma's Liabilities

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$44.7m due beyond that. On the other hand, it had cash of US$46.5m and US$28.3m worth of receivables due within a year. So it has liabilities totalling US$53.6m more than its cash and near-term receivables, combined.

This deficit isn't so bad because Aytu Biopharma is worth US$90.6m, and thus could probably raise enough capital to shore up its balance sheet, if the need arose. However, it is still worthwhile taking a close look at its ability to pay off debt. While it does have liabilities worth noting, Aytu Biopharma also has more cash than debt, so we're pretty confident it can manage its debt safely. The balance sheet is clearly the area to focus on when you are analysing debt. 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.

In the last year Aytu Biopharma wasn't profitable at an EBIT level, but managed to grow its revenue by 294%, to US$57m. When it comes to revenue growth, that's like nailing the game winning 3-pointer!

So How Risky Is Aytu Biopharma?

By their very nature companies that are losing money are more risky than those with a long history of profitability. And the fact is that over the last twelve months Aytu Biopharma lost money at the earnings before interest and tax (EBIT) line. Indeed, in that time it burnt through US$33m of cash and made a loss of US$42m. But at least it has US$24.5m on the balance sheet to spend on growth, near-term. The good news for shareholders is that Aytu Biopharma has dazzling revenue growth, so there's a very good chance it can boost its free cash flow in the years to come. While unprofitable companies can be risky, they can also grow hard and fast in those pre-profit years. 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. For example Aytu Biopharma has 4 warning signs (and 1 which doesn't sit too well with us) we think you should know about.

If, after all that, you're more interested in a fast growing company with a rock-solid balance sheet, then check out our list of net cash growth stocks without delay.

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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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