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Is Athenex (NASDAQ:ATNX) Using Debt Sensibly?

Simply Wall St

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 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 Athenex, Inc. (NASDAQ:ATNX) does have debt on its balance sheet. But should shareholders be worried about its use of debt?

When Is Debt A Problem?

Debt and other liabilities become risky for a business when it cannot easily fulfill those obligations, either with free cash flow or by raising capital at an attractive price. If things get really bad, the lenders can take control of the business. 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. Of course, the upside of debt is that it often represents cheap capital, especially when it replaces dilution in a company with the ability to reinvest 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.

Check out our latest analysis for Athenex

What Is Athenex's Net Debt?

The image below, which you can click on for greater detail, shows that at June 2019 Athenex had debt of US$50.3m, up from US$1.50m in one year. However, its balance sheet shows it holds US$140.5m in cash, so it actually has US$90.2m net cash.

NasdaqGS:ATNX Historical Debt, September 12th 2019
NasdaqGS:ATNX Historical Debt, September 12th 2019

A Look At Athenex's Liabilities

We can see from the most recent balance sheet that Athenex had liabilities of US$95.3m falling due within a year, and liabilities of US$59.8m due beyond that. On the other hand, it had cash of US$140.5m and US$49.5m worth of receivables due within a year. So it actually has US$34.9m more liquid assets than total liabilities.

This surplus suggests that Athenex has a conservative balance sheet, and could probably eliminate its debt without much difficulty. Simply put, the fact that Athenex 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 Athenex 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.

In the last year Athenex managed to grow its revenue by 11%, to US$87m. That rate of growth is a bit slow for our taste, but it takes all types to make a world.

So How Risky Is Athenex?

We have no doubt that loss making companies are, in general, riskier than profitable ones. And in the last year Athenex had negative earnings before interest and tax (EBIT), truth be told. Indeed, in that time it burnt through US$120m of cash and made a loss of US$141m. But at least it has US$140m on the balance sheet to spend on growth, near-term. Overall, its balance sheet doesn't seem overly risky, at the moment, but we're always cautious until we see the positive free cash flow. For riskier companies like Athenex I always like to keep an eye on whether insiders are buying or selling. So click here if you want to find out for yourself.

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.

We aim to bring you long-term focused research analysis driven by fundamental data. Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative material.

If you spot an error that warrants correction, please contact the editor at editorial-team@simplywallst.com. 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. Simply Wall St has no position in the stocks mentioned. Thank you for reading.