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. Importantly, Antares Pharma, Inc. (NASDAQ:ATRS) does carry debt. But is this debt a concern to shareholders?
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 usual (but still expensive) situation is where a company must dilute shareholders at a cheap share price simply to get debt under control. 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.
What Is Antares Pharma's Net Debt?
As you can see below, Antares Pharma had US$40.6m 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$51.6m in cash, leading to a US$10.9m net cash position.
How Strong Is Antares Pharma's Balance Sheet?
Zooming in on the latest balance sheet data, we can see that Antares Pharma had liabilities of US$40.0m due within 12 months and liabilities of US$45.8m due beyond that. Offsetting this, it had US$51.6m in cash and US$41.3m in receivables that were due within 12 months. So it can boast US$7.06m more liquid assets than total liabilities.
This state of affairs indicates that Antares Pharma's balance sheet looks quite solid, as its total liabilities are just about equal to its liquid assets. So while it's hard to imagine that the US$443.5m company is struggling for cash, we still think it's worth monitoring its balance sheet. Simply put, the fact that Antares Pharma has more cash than debt is arguably a good indication that it can manage its debt safely.
Notably, Antares Pharma made a loss at the EBIT level, last year, but improved that to positive EBIT of US$9.2m in the last twelve months. There's no doubt that we learn most about debt from the balance sheet. But ultimately the future profitability of the business will decide if Antares Pharma can strengthen its balance sheet over time. So if you're focused on the future you can check out this free report showing analyst profit forecasts.
Finally, while the tax-man may adore accounting profits, lenders only accept cold hard cash. While Antares Pharma 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, Antares Pharma produced sturdy free cash flow equating to 66% of its EBIT, about what we'd expect. This cold hard cash means it can reduce its debt when it wants to.
While it is always sensible to investigate a company's debt, in this case Antares Pharma has US$10.9m in net cash and a decent-looking balance sheet. And it impressed us with free cash flow of US$6.1m, being 66% of its EBIT. So we are not troubled with Antares Pharma's debt use. When analysing debt levels, the balance sheet is the obvious place to start. However, not all investment risk resides within the balance sheet - far from it. Be aware that Antares Pharma is showing 1 warning sign in our investment analysis , 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. 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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