These 4 Measures Indicate That OPKO Health (NASDAQ:OPK) Is Using Debt Reasonably Well

Howard Marks put it nicely when he said that, rather than worrying about share price volatility, 'The possibility of permanent loss is the risk I worry about... and every practical investor I know worries about.' It's only natural to consider a company's balance sheet when you examine how risky it is, since debt is often involved when a business collapses. As with many other companies OPKO Health, Inc. (NASDAQ:OPK) makes use of debt. But is this debt a concern to shareholders?

When Is Debt Dangerous?

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, the upside of debt is that it often represents cheap capital, especially when it replaces dilution in a company with the ability to reinvest at high rates of return. When we think about a company's use of debt, we first look at cash and debt together.

Check out our latest analysis for OPKO Health

What Is OPKO Health's Debt?

The image below, which you can click on for greater detail, shows that OPKO Health had debt of US$245.9m at the end of March 2021, a reduction from US$269.5m over a year. However, because it has a cash reserve of US$89.5m, its net debt is less, at about US$156.4m.

How Healthy Is OPKO Health's Balance Sheet?

Zooming in on the latest balance sheet data, we can see that OPKO Health had liabilities of US$403.9m due within 12 months and liabilities of US$419.1m due beyond that. On the other hand, it had cash of US$89.5m and US$330.3m worth of receivables due within a year. So it has liabilities totalling US$403.3m more than its cash and near-term receivables, combined.

Given OPKO Health has a market capitalization of US$2.61b, it's hard to believe these liabilities pose much threat. Having said that, it's clear that we should continue to monitor its balance sheet, lest it change for the worse.

We use two main ratios to inform us about debt levels relative to earnings. The first is net debt divided by earnings before interest, tax, depreciation, and amortization (EBITDA), while the second is how many times its earnings before interest and tax (EBIT) covers its interest expense (or its interest cover, for short). This way, we consider both the absolute quantum of the debt, as well as the interest rates paid on it.

Looking at its net debt to EBITDA of 0.72 and interest cover of 6.1 times, it seems to us that OPKO Health is probably using debt in a pretty reasonable way. So we'd recommend keeping a close eye on the impact financing costs are having on the business. It was also good to see that despite losing money on the EBIT line last year, OPKO Health turned things around in the last 12 months, delivering and EBIT of US$133m. 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.

Finally, while the tax-man may adore accounting profits, lenders only accept cold hard cash. So it is important to check how much of its earnings before interest and tax (EBIT) converts to actual free cash flow. During the last year, OPKO Health produced sturdy free cash flow equating to 54% of its EBIT, about what we'd expect. This cold hard cash means it can reduce its debt when it wants to.

Our View

On our analysis OPKO Health's net debt to EBITDA should signal that it won't have too much trouble with its debt. However, our other observations weren't so heartening. For instance it seems like it has to struggle a bit to grow its EBIT. When we consider all the elements mentioned above, it seems to us that OPKO Health is managing its debt quite well. Having said that, the load is sufficiently heavy that we would recommend any shareholders keep a close eye on it. 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. These risks can be hard to spot. Every company has them, and we've spotted 2 warning signs for OPKO Health you should know about.

At the end of the day, it's often better to focus on companies that are free from net debt. You can access our special list of such companies (all with a track record of profit growth). It's free.

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