Does Emergent BioSolutions (NYSE:EBS) Have A Healthy Balance Sheet?

By
Simply Wall St
Published
January 20, 2022
NYSE:EBS
Source: Shutterstock

Warren Buffett famously said, 'Volatility is far from synonymous with risk.' 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. We can see that Emergent BioSolutions Inc. (NYSE:EBS) does use debt in its business. But the real question is whether this debt is making the company risky.

What Risk Does Debt Bring?

Generally speaking, debt only becomes a real problem when a company can't easily pay it off, either by raising capital or with its own cash flow. Part and parcel of capitalism is the process of 'creative destruction' where failed businesses are mercilessly liquidated by their bankers. While that is not too common, we often do see indebted companies permanently diluting shareholders because lenders force them to raise capital at a distressed price. Of course, debt can be an important tool in businesses, particularly capital heavy businesses. When we think about a company's use of debt, we first look at cash and debt together.

View our latest analysis for Emergent BioSolutions

What Is Emergent BioSolutions's Net Debt?

As you can see below, Emergent BioSolutions had US$859.0m of debt at September 2021, down from US$895.7m a year prior. However, because it has a cash reserve of US$403.8m, its net debt is less, at about US$455.2m.

debt-equity-history-analysis
NYSE:EBS Debt to Equity History January 20th 2022

How Healthy Is Emergent BioSolutions' Balance Sheet?

According to the last reported balance sheet, Emergent BioSolutions had liabilities of US$365.4m due within 12 months, and liabilities of US$979.4m due beyond 12 months. Offsetting this, it had US$403.8m in cash and US$254.6m in receivables that were due within 12 months. So its liabilities total US$686.4m more than the combination of its cash and short-term receivables.

While this might seem like a lot, it is not so bad since Emergent BioSolutions has a market capitalization of US$2.45b, and so it could probably strengthen its balance sheet by raising capital if it needed to. However, it is still worthwhile taking a close look at its ability to pay off debt.

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). Thus we consider debt relative to earnings both with and without depreciation and amortization expenses.

With net debt sitting at just 1.0 times EBITDA, Emergent BioSolutions is arguably pretty conservatively geared. And it boasts interest cover of 9.8 times, which is more than adequate. While Emergent BioSolutions doesn't seem to have gained much on the EBIT line, at least earnings remain stable for now. There's no doubt that we learn most about debt from the balance sheet. But it is future earnings, more than anything, that will determine Emergent BioSolutions'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's worth checking how much of that EBIT is backed by free cash flow. Over the last three years, Emergent BioSolutions reported free cash flow worth 14% of its EBIT, which is really quite low. For us, cash conversion that low sparks a little paranoia about is ability to extinguish debt.

Our View

Emergent BioSolutions's interest cover was a real positive on this analysis, as was its net debt to EBITDA. On the other hand, its conversion of EBIT to free cash flow makes us a little less comfortable about its debt. When we consider all the factors mentioned above, we do feel a bit cautious about Emergent BioSolutions's use of debt. While we appreciate debt can enhance returns on equity, we'd suggest that shareholders keep close watch on its debt levels, lest they increase. 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. For example Emergent BioSolutions has 2 warning signs (and 1 which shouldn't be ignored) we think you should know about.

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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