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David Iben put it well when he said, 'Volatility is not a risk we care about. What we care about is avoiding the permanent loss of capital.' 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, Anika Therapeutics, Inc. (NASDAQ:ANIK) does carry debt. But is this debt a concern to shareholders?
What Risk Does Debt Bring?
Debt is a tool to help businesses grow, but if a business is incapable of paying off its lenders, then it exists at their mercy. Part and parcel of capitalism is the process of 'creative destruction' where failed businesses are mercilessly liquidated by their bankers. 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. Of course, debt can be an important tool in businesses, particularly capital heavy businesses. The first step when considering a company's debt levels is to consider its cash and debt together.
What Is Anika Therapeutics's Debt?
You can click the graphic below for the historical numbers, but it shows that as of September 2020 Anika Therapeutics had US$25.0m of debt, an increase on none, over one year. But it also has US$124.8m in cash to offset that, meaning it has US$99.8m net cash.
How Healthy Is Anika Therapeutics' Balance Sheet?
According to the last reported balance sheet, Anika Therapeutics had liabilities of US$31.1m due within 12 months, and liabilities of US$100.7m due beyond 12 months. Offsetting this, it had US$124.8m in cash and US$23.0m in receivables that were due within 12 months. So it can boast US$15.9m more liquid assets than total liabilities.
This short term liquidity is a sign that Anika Therapeutics could probably pay off its debt with ease, as its balance sheet is far from stretched. Simply put, the fact that Anika Therapeutics has more cash than debt is arguably a good indication that it can manage its debt safely.
In fact Anika Therapeutics's saving grace is its low debt levels, because its EBIT has tanked 72% in the last twelve months. When a company sees its earnings tank, it can sometimes find its relationships with its lenders turn sour. 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 Anika Therapeutics 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 Anika Therapeutics 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. Over the last three years, Anika Therapeutics actually produced more free cash flow than EBIT. There's nothing better than incoming cash when it comes to staying in your lenders' good graces.
While it is always sensible to investigate a company's debt, in this case Anika Therapeutics has US$99.8m in net cash and a decent-looking balance sheet. And it impressed us with free cash flow of US$22m, being 101% of its EBIT. So we don't have any problem with Anika Therapeutics's use of debt. 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. Case in point: We've spotted 1 warning sign for Anika Therapeutics you should be aware of.
If, after all that, you're more interested in a fast growing company with a rock-solid balance sheet, then check out our list of net cash growth stocks without delay.
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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