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.' 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. We note that OPKO Health, Inc. (NASDAQ:OPK) does have debt on its balance sheet. But the more important question is: how much risk is that debt creating?
When Is Debt A Problem?
Debt and other liabilities become risky for a business when it cannot easily fulfill those obligations, either with free cash flow or by raising capital at an attractive price. Ultimately, if the company can't fulfill its legal obligations to repay debt, shareholders could walk away with nothing. However, a more frequent (but still costly) occurrence is where a company must issue shares at bargain-basement prices, permanently diluting shareholders, just to shore up its balance sheet. Of course, debt can be an important tool in businesses, particularly capital heavy businesses. The first step when considering a company's debt levels is to consider its cash and debt together.
How Much Debt Does OPKO Health Carry?
You can click the graphic below for the historical numbers, but it shows that OPKO Health had US$235.9m of debt in September 2020, down from US$270.6m, one year before. However, it also had US$36.3m in cash, and so its net debt is US$199.6m.
How Strong Is OPKO Health's Balance Sheet?
The latest balance sheet data shows that OPKO Health had liabilities of US$335.9m due within a year, and liabilities of US$411.6m falling due after that. Offsetting this, it had US$36.3m in cash and US$256.3m in receivables that were due within 12 months. So its liabilities outweigh the sum of its cash and (near-term) receivables by US$454.9m.
Of course, OPKO Health has a market capitalization of US$2.95b, so these liabilities are probably manageable. However, we do think it is worth keeping an eye on its balance sheet strength, as it may change over time. When analysing debt levels, the balance sheet is the obvious place to start. But it is future earnings, more than anything, that will determine OPKO Health'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.
In the last year OPKO Health wasn't profitable at an EBIT level, but managed to grow its revenue by 30%, to US$1.2b. With any luck the company will be able to grow its way to profitability.
Despite the top line growth, OPKO Health still had an earnings before interest and tax (EBIT) loss over the last year. To be specific the EBIT loss came in at US$23m. When we look at that and recall the liabilities on its balance sheet, relative to cash, it seems unwise to us for the company to have any debt. Quite frankly we think the balance sheet is far from match-fit, although it could be improved with time. However, it doesn't help that it burned through US$72m of cash over the last year. So to be blunt we think it is risky. The balance sheet is clearly the area to focus on when you are analysing debt. But ultimately, every company can contain risks that exist outside of the balance sheet. Consider for instance, the ever-present spectre of investment risk. We've identified 2 warning signs with OPKO Health , and understanding them should be part of your investment process.
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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