These 4 Measures Indicate That Opiant Pharmaceuticals (NASDAQ:OPNT) 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.' 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 can see that Opiant Pharmaceuticals, Inc. (NASDAQ:OPNT) does use debt in its business. But the real question is whether this debt is making the company risky.

What Risk Does Debt Bring?

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. In the worst case scenario, a company can go bankrupt if it cannot pay its creditors. 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, plenty of companies use debt to fund growth, without any negative consequences. When we think about a company's use of debt, we first look at cash and debt together.

See our latest analysis for Opiant Pharmaceuticals

How Much Debt Does Opiant Pharmaceuticals Carry?

As you can see below, at the end of September 2021, Opiant Pharmaceuticals had US$18.9m of debt, up from none a year ago. Click the image for more detail. However, it does have US$50.3m in cash offsetting this, leading to net cash of US$31.4m.

How Strong Is Opiant Pharmaceuticals' Balance Sheet?

Zooming in on the latest balance sheet data, we can see that Opiant Pharmaceuticals had liabilities of US$7.35m due within 12 months and liabilities of US$19.6m due beyond that. Offsetting these obligations, it had cash of US$50.3m as well as receivables valued at US$15.4m due within 12 months. So it actually has US$38.8m more liquid assets than total liabilities.

This excess liquidity is a great indication that Opiant Pharmaceuticals' balance sheet is almost as strong as Fort Knox. On this view, lenders should feel as safe as the beloved of a black-belt karate master. Succinctly put, Opiant Pharmaceuticals boasts net cash, so it's fair to say it does not have a heavy debt load!

We also note that Opiant Pharmaceuticals improved its EBIT from a last year's loss to a positive US$2.9m. The balance sheet is clearly the area to focus on when you are analysing debt. But it is future earnings, more than anything, that will determine Opiant Pharmaceuticals's ability to maintain a healthy balance sheet going forward. So if you're focused on the future you can check out this free report showing analyst profit forecasts.

But our final consideration is also important, because a company cannot pay debt with paper profits; it needs cold hard cash. While Opiant Pharmaceuticals has net cash on its balance sheet, it's still worth taking a look at its ability to convert earnings before interest and tax (EBIT) to free cash flow, to help us understand how quickly it is building (or eroding) that cash balance. During the last year, Opiant Pharmaceuticals burned a lot of cash. While investors are no doubt expecting a reversal of that situation in due course, it clearly does mean its use of debt is more risky.

Summing up

While it is always sensible to investigate a company's debt, in this case Opiant Pharmaceuticals has US$31.4m in net cash and a decent-looking balance sheet. So we don't have any problem with Opiant Pharmaceuticals's use of debt. 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. These risks can be hard to spot. Every company has them, and we've spotted 4 warning signs for Opiant Pharmaceuticals (of which 2 are a bit concerning!) 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.

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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