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These 4 Measures Indicate That Amphastar Pharmaceuticals (NASDAQ:AMPH) Is Using Debt Safely

Simply Wall St
·4 min read

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.' 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 note that Amphastar Pharmaceuticals, Inc. (NASDAQ:AMPH) does have debt on its balance sheet. But the more important question is: how much risk is that debt creating?

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. In the worst case scenario, a company can go bankrupt if it cannot pay its creditors. 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.

View our latest analysis for Amphastar Pharmaceuticals

What Is Amphastar Pharmaceuticals's Net Debt?

As you can see below, Amphastar Pharmaceuticals had US$46.0m of debt, at June 2020, which is about the same as the year before. You can click the chart for greater detail. But on the other hand it also has US$98.5m in cash, leading to a US$52.5m net cash position.

debt-equity-history-analysis
debt-equity-history-analysis

How Strong Is Amphastar Pharmaceuticals's Balance Sheet?

We can see from the most recent balance sheet that Amphastar Pharmaceuticals had liabilities of US$93.3m falling due within a year, and liabilities of US$64.3m due beyond that. Offsetting this, it had US$98.5m in cash and US$50.5m in receivables that were due within 12 months. So it has liabilities totalling US$8.59m more than its cash and near-term receivables, combined.

This state of affairs indicates that Amphastar Pharmaceuticals's balance sheet looks quite solid, as its total liabilities are just about equal to its liquid assets. So it's very unlikely that the US$1.00b company is short on cash, but still worth keeping an eye on the balance sheet. Despite its noteworthy liabilities, Amphastar Pharmaceuticals boasts net cash, so it's fair to say it does not have a heavy debt load!

Even more impressive was the fact that Amphastar Pharmaceuticals grew its EBIT by 255% over twelve months. That boost will make it even easier to pay down debt going forward. When analysing debt levels, the balance sheet is the obvious place to start. But it is future earnings, more than anything, that will determine Amphastar 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 business needs free cash flow to pay off debt; accounting profits just don't cut it. Amphastar Pharmaceuticals may have net cash on the balance sheet, but it is still interesting to look at how well the business converts its earnings before interest and tax (EBIT) to free cash flow, because that will influence both its need for, and its capacity to manage debt. Happily for any shareholders, Amphastar Pharmaceuticals actually produced more free cash flow than EBIT over the last two years. That sort of strong cash generation warms our hearts like a puppy in a bumblebee suit.

Summing up

While it is always sensible to look at a company's total liabilities, it is very reassuring that Amphastar Pharmaceuticals has US$52.5m in net cash. The cherry on top was that in converted 182% of that EBIT to free cash flow, bringing in -US$11m. So we don't think Amphastar Pharmaceuticals's use of debt is risky. There's no doubt that we learn most about debt from the balance sheet. But ultimately, every company can contain risks that exist outside of the balance sheet. Take risks, for example - Amphastar Pharmaceuticals has 2 warning signs we think you should be aware of.

Of course, if you're the type of investor who prefers buying stocks without the burden of debt, then don't hesitate to discover our exclusive list of net cash growth stocks, today.

This article by Simply Wall St is general in nature. 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.

Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team@simplywallst.com.