Is Bioanalytical Systems (NASDAQ:BASI) Using Too Much Debt?

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 seems the smart money knows that debt - which is usually involved in bankruptcies - is a very important factor, when you assess how risky a company is. We note that Bioanalytical Systems, Inc. (NASDAQ:BASI) does have debt on its balance sheet. But the real question is whether this debt is making the company risky.

Why Does Debt Bring Risk?

Debt is a tool to help businesses grow, but if a business is incapable of paying off its lenders, then it exists at their mercy. Ultimately, if the company can't fulfill its legal obligations to repay debt, shareholders could walk away with nothing. However, a more common (but still painful) scenario is that it has to raise new equity capital at a low price, thus permanently diluting shareholders. Of course, debt can be an important tool in businesses, particularly capital heavy businesses. When we examine debt levels, we first consider both cash and debt levels, together.

Check out our latest analysis for Bioanalytical Systems

How Much Debt Does Bioanalytical Systems Carry?

As you can see below, at the end of June 2020, Bioanalytical Systems had US$27.6m of debt, up from US$14.3m a year ago. Click the image for more detail. However, it does have US$2.95m in cash offsetting this, leading to net debt of about US$24.6m.

How Strong Is Bioanalytical Systems's Balance Sheet?

The latest balance sheet data shows that Bioanalytical Systems had liabilities of US$29.5m due within a year, and liabilities of US$25.0m falling due after that. Offsetting this, it had US$2.95m in cash and US$11.2m in receivables that were due within 12 months. So it has liabilities totalling US$40.3m more than its cash and near-term receivables, combined.

This deficit is considerable relative to its market capitalization of US$55.9m, so it does suggest shareholders should keep an eye on Bioanalytical Systems's use of debt. Should its lenders demand that it shore up the balance sheet, shareholders would likely face severe dilution.

We measure a company's debt load relative to its earnings power by looking at its net debt divided by its earnings before interest, tax, depreciation, and amortization (EBITDA) and by calculating how easily its earnings before interest and tax (EBIT) cover its interest expense (interest cover). This way, we consider both the absolute quantum of the debt, as well as the interest rates paid on it.

Weak interest cover of 0.27 times and a disturbingly high net debt to EBITDA ratio of 7.7 hit our confidence in Bioanalytical Systems like a one-two punch to the gut. The debt burden here is substantial. One redeeming factor for Bioanalytical Systems is that it turned last year's EBIT loss into a gain of US$351k, over the last twelve months. When analysing debt levels, the balance sheet is the obvious place to start. But it is Bioanalytical Systems's earnings that will influence how the balance sheet holds up in the future. So if you're keen to discover more about its earnings, it might be worth checking out this graph of its long term earnings trend.

Finally, a company can only pay off debt with cold hard cash, not accounting profits. So it's worth checking how much of the earnings before interest and tax (EBIT) is backed by free cash flow. Over the last year, Bioanalytical Systems saw substantial negative free cash flow, in total. While that may be a result of expenditure for growth, it does make the debt far more risky.

Our View

To be frank both Bioanalytical Systems's interest cover and its track record of converting EBIT to free cash flow make us rather uncomfortable with its debt levels. Having said that, its ability to grow its EBIT isn't such a worry. Overall, it seems to us that Bioanalytical Systems's balance sheet is really quite a risk to the business. For this reason we're pretty cautious about the stock, and we think shareholders should keep a close eye on its liquidity. 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. Case in point: We've spotted 4 warning signs for Bioanalytical Systems you should be aware of, and 2 of them don't sit too well with us.

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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