Howard Marks put it nicely when he said that, rather than worrying about share price volatility, 'The possibility of permanent loss is the risk I worry about... and every practical investor I know worries about. So it seems the smart money knows that debt - which is usually involved in bankruptcies - is a very important factor, when you assess how risky a company is. We can see that AnaptysBio, Inc. (NASDAQ:ANAB) does use debt in its business. But the real question is whether this debt is making the company risky.
Why Does Debt Bring Risk?
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. In the worst case scenario, a company can go bankrupt if it cannot pay its creditors. 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, plenty of companies use debt to fund growth, without any negative consequences. The first thing to do when considering how much debt a business uses is to look at its cash and debt together.
What Is AnaptysBio's Net Debt?
As you can see below, AnaptysBio had US$3.08m of debt at September 2019, down from US$9.91m a year prior. But it also has US$421.0m in cash to offset that, meaning it has US$417.9m net cash.
A Look At AnaptysBio's Liabilities
The latest balance sheet data shows that AnaptysBio had liabilities of US$29.7m due within a year, and liabilities of US$883.0k falling due after that. On the other hand, it had cash of US$421.0m and US$5.00m worth of receivables due within a year. So it can boast US$395.4m more liquid assets than total liabilities.
This excess liquidity is a great indication that AnaptysBio's balance sheet is just as strong as racists are weak. On this view, lenders should feel as safe as the beloved of a black-belt karate master. Simply put, the fact that AnaptysBio has more cash than debt is arguably a good indication that it can manage its debt safely. When analysing debt levels, the balance sheet is the obvious place to start. But ultimately the future profitability of the business will decide if AnaptysBio can strengthen its balance sheet over time. 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, AnaptysBio made a loss at the EBIT level, and saw its revenue drop to US$5.0m, which is a fall of 38%. That makes us nervous, to say the least.
So How Risky Is AnaptysBio?
We have no doubt that loss making companies are, in general, riskier than profitable ones. And we do note that AnaptysBio had negative earnings before interest and tax (EBIT), over the last year. And over the same period it saw negative free cash outflow of US$67m and booked a US$94m accounting loss. While this does make the company a bit risky, it's important to remember it has net cash of US$417.9m. That means it could keep spending at its current rate for more than two years. Even though its balance sheet seems sufficiently liquid, debt always makes us a little nervous if a company doesn't produce free cash flow regularly. When analysing debt levels, the balance sheet is the obvious place to start. But ultimately, every company can contain risks that exist outside of the balance sheet. Be aware that AnaptysBio is showing 5 warning signs in our investment analysis , and 1 of those is a bit unpleasant...
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.
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