Stock Analysis

Is Amneal Pharmaceuticals (NYSE:AMRX) A Risky Investment?

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NYSE:AMRX
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Warren Buffett famously said, 'Volatility is far from synonymous with risk.' 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. We note that Amneal Pharmaceuticals, Inc. (NYSE:AMRX) 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 assists a business until the business has trouble paying it off, either with new capital or with free cash flow. 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. By replacing dilution, though, debt can be an extremely good tool for businesses that need capital to invest in growth at high rates of return. The first thing to do when considering how much debt a business uses is to look at its cash and debt together.

Check out our latest analysis for Amneal Pharmaceuticals

What Is Amneal Pharmaceuticals's Net Debt?

You can click the graphic below for the historical numbers, but it shows that as of December 2020 Amneal Pharmaceuticals had US$2.87b of debt, an increase on US$2.63b, over one year. On the flip side, it has US$343.1m in cash leading to net debt of about US$2.53b.

debt-equity-history-analysis
NYSE:AMRX Debt to Equity History April 28th 2021

How Healthy Is Amneal Pharmaceuticals' Balance Sheet?

Zooming in on the latest balance sheet data, we can see that Amneal Pharmaceuticals had liabilities of US$676.9m due within 12 months and liabilities of US$2.97b due beyond that. Offsetting these obligations, it had cash of US$343.1m as well as receivables valued at US$674.2m due within 12 months. So its liabilities outweigh the sum of its cash and (near-term) receivables by US$2.63b.

The deficiency here weighs heavily on the US$1.74b company itself, as if a child were struggling under the weight of an enormous back-pack full of books, his sports gear, and a trumpet. So we'd watch its balance sheet closely, without a doubt. At the end of the day, Amneal Pharmaceuticals would probably need a major re-capitalization if its creditors were to demand repayment.

In order to size up a company's debt relative to its earnings, we calculate its net debt divided by its earnings before interest, tax, depreciation, and amortization (EBITDA) and its earnings before interest and tax (EBIT) divided by its interest expense (its interest cover). Thus we consider debt relative to earnings both with and without depreciation and amortization expenses.

Weak interest cover of 1.00 times and a disturbingly high net debt to EBITDA ratio of 6.6 hit our confidence in Amneal Pharmaceuticals like a one-two punch to the gut. This means we'd consider it to have a heavy debt load. However, the silver lining was that Amneal Pharmaceuticals achieved a positive EBIT of US$146m in the last twelve months, an improvement on the prior year's loss. When analysing debt levels, the balance sheet is the obvious place to start. But it is future earnings, more than anything, that will determine Amneal Pharmaceuticals'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, 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. Happily for any shareholders, Amneal Pharmaceuticals actually produced more free cash flow than EBIT over the last year. That sort of strong cash generation warms our hearts like a puppy in a bumblebee suit.

Our View

On the face of it, Amneal Pharmaceuticals's net debt to EBITDA left us tentative about the stock, and its interest cover was no more enticing than the one empty restaurant on the busiest night of the year. But at least it's pretty decent at converting EBIT to free cash flow; that's encouraging. Looking at the bigger picture, it seems clear to us that Amneal Pharmaceuticals's use of debt is creating risks for the company. If all goes well, that should boost returns, but on the flip side, the risk of permanent capital loss is elevated by the debt. 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. Case in point: We've spotted 3 warning signs for Amneal Pharmaceuticals you should be aware of, and 1 of them doesn't sit too well with us.

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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