Is Emergent BioSolutions (NYSE:EBS) Using Too Much Debt?

Some say volatility, rather than debt, is the best way to think about risk as an investor, but Warren Buffett famously said that '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 note that Emergent BioSolutions Inc. (NYSE:EBS) does have debt on its balance sheet. 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. Ultimately, if the company can't fulfill its legal obligations to repay debt, shareholders could walk away with nothing. 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, debt can be an important tool in businesses, particularly capital heavy businesses. 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 Emergent BioSolutions

How Much Debt Does Emergent BioSolutions Carry?

As you can see below, at the end of December 2022, Emergent BioSolutions had US$1.41b of debt, up from US$847.1m a year ago. Click the image for more detail. However, because it has a cash reserve of US$651.1m, its net debt is less, at about US$754.7m.

How Strong Is Emergent BioSolutions' Balance Sheet?

We can see from the most recent balance sheet that Emergent BioSolutions had liabilities of US$1.23b falling due within a year, and liabilities of US$553.7m due beyond that. On the other hand, it had cash of US$651.1m and US$158.4m worth of receivables due within a year. So its liabilities outweigh the sum of its cash and (near-term) receivables by US$974.1m.

This deficit casts a shadow over the US$495.4m company, like a colossus towering over mere mortals. So we'd watch its balance sheet closely, without a doubt. After all, Emergent BioSolutions would likely require a major re-capitalisation if it had to pay its creditors today. When analysing debt levels, the balance sheet is the obvious place to start. 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.

Over 12 months, Emergent BioSolutions made a loss at the EBIT level, and saw its revenue drop to US$1.1b, which is a fall of 37%. That makes us nervous, to say the least.

Caveat Emptor

Not only did Emergent BioSolutions's revenue slip over the last twelve months, but it also produced negative earnings before interest and tax (EBIT). Indeed, it lost a very considerable US$163m at the EBIT level. When we look at that alongside the significant liabilities, we're not particularly confident about the company. It would need to improve its operations quickly for us to be interested in it. Not least because it burned through US$150m in negative free cash flow over the last year. So suffice it to say we consider the stock to be risky. The balance sheet is clearly the area to focus on when you are analysing debt. However, not all investment risk resides within the balance sheet - far from it. Be aware that Emergent BioSolutions is showing 2 warning signs in our investment analysis , and 1 of those is a bit concerning...

When all is said and done, sometimes its easier to focus on companies that don't even need debt. Readers can access a list of growth stocks with zero net debt 100% free, right now.

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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.