Is Aytu BioPharma (NASDAQ:AYTU) Using Debt Sensibly?

Legendary fund manager Li Lu (who Charlie Munger backed) once said, '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. 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. Having said that, the most common situation is where a company manages its debt reasonably well - and to its own advantage. The first step when considering a company's debt levels is to consider its cash and debt together.

Check out our latest analysis for Aytu BioPharma

How Much Debt Does Aytu BioPharma Carry?

You can click the graphic below for the historical numbers, but it shows that Aytu BioPharma had US$15.1m of debt in June 2024, down from US$16.3m, one year before. But it also has US$20.0m in cash to offset that, meaning it has US$4.88m 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$62.2m falling due within a year, and liabilities of US$28.2m due beyond that. On the other hand, it had cash of US$20.0m and US$23.6m worth of receivables due within a year. So it has liabilities totalling US$46.8m more than its cash and near-term receivables, combined.

This deficit casts a shadow over the US$11.8m company, like a colossus towering over mere mortals. So we definitely think shareholders need to watch this one closely. At the end of the day, Aytu BioPharma would probably need a major re-capitalization if its creditors were to demand repayment. 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. 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 had a loss before interest and tax, and actually shrunk its revenue by 25%, to US$81m. That makes us nervous, to say the least.

So How Risky Is Aytu BioPharma?

Statistically speaking companies that lose money are riskier than those that make money. And the fact is that over the last twelve months Aytu BioPharma lost money at the earnings before interest and tax (EBIT) line. And over the same period it saw negative free cash outflow of US$1.4m and booked a US$16m accounting loss. While this does make the company a bit risky, it's important to remember it has net cash of US$4.88m. That kitty means the company can keep spending for growth for at least two years, at current rates. Summing up, we're a little skeptical of this one, as it seems fairly risky in the absence of free cashflow. When analysing debt levels, the balance sheet is the obvious place to start. But ultimately, every company can contain risks that exist outside of the balance sheet. We've identified 2 warning signs with Aytu BioPharma , and understanding them should be part of your investment process.

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.

Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team (at) simplywallst.com.

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.