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. Importantly, ADMA Biologics, Inc. (NASDAQ:ADMA) does carry debt. But should shareholders be worried about its use of debt?
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. Part and parcel of capitalism is the process of 'creative destruction' where failed businesses are mercilessly liquidated by their bankers. 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. 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. When we examine debt levels, we first consider both cash and debt levels, together.
How Much Debt Does ADMA Biologics Carry?
The image below, which you can click on for greater detail, shows that at March 2020 ADMA Biologics had debt of US$96.1m, up from US$55.8m in one year. However, its balance sheet shows it holds US$101.2m in cash, so it actually has US$5.11m net cash.
A Look At ADMA Biologics's Liabilities
We can see from the most recent balance sheet that ADMA Biologics had liabilities of US$13.9m falling due within a year, and liabilities of US$100.3m due beyond that. Offsetting this, it had US$101.2m in cash and US$7.11m in receivables that were due within 12 months. So its liabilities outweigh the sum of its cash and (near-term) receivables by US$5.84m.
Given ADMA Biologics has a market capitalization of US$249.5m, it's hard to believe these liabilities pose much threat. But there are sufficient liabilities that we would certainly recommend shareholders continue to monitor the balance sheet, going forward. Despite its noteworthy liabilities, ADMA Biologics boasts net cash, so it's fair to say it does not have a heavy debt load! The balance sheet is clearly the area to focus on when you are analysing debt. But ultimately the future profitability of the business will decide if ADMA Biologics 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.
Over 12 months, ADMA Biologics reported revenue of US$36m, which is a gain of 118%, although it did not report any earnings before interest and tax. So its pretty obvious shareholders are hoping for more growth!
So How Risky Is ADMA Biologics?
We have no doubt that loss making companies are, in general, riskier than profitable ones. And the fact is that over the last twelve months ADMA Biologics lost money at the earnings before interest and tax (EBIT) line. Indeed, in that time it burnt through US$92m of cash and made a loss of US$54m. However, it has net cash of US$5.11m, so it has a bit of time before it will need more capital. The good news for shareholders is that ADMA Biologics has dazzling revenue growth, so there's a very good chance it can boost its free cash flow in the years to come. While unprofitable companies can be risky, they can also grow hard and fast in those pre-profit years. 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. Consider for instance, the ever-present spectre of investment risk. We've identified 2 warning signs with ADMA Biologics (at least 1 which doesn't sit too well with us) , and understanding them should be part of your investment process.
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.
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