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Is Aytu Biopharma (NASDAQ:AYTU) Using Debt In A Risky Way?

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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. We can see that Aytu Biopharma, Inc. (NASDAQ:AYTU) does use debt in its business. But the real question is whether this debt is making the company risky.

When Is Debt A Problem?

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. Ultimately, if the company can't fulfill its legal obligations to repay debt, shareholders could walk away with nothing. 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, debt can be an important tool in businesses, particularly capital heavy businesses. When we examine debt levels, we first consider both cash and debt levels, together.

Check out our latest analysis for Aytu Biopharma

What Is Aytu Biopharma's Debt?

The image below, which you can click on for greater detail, shows that at June 2021 Aytu Biopharma had debt of US$24.8m, up from US$982.1k in one year. However, its balance sheet shows it holds US$49.6m in cash, so it actually has US$24.9m net cash.

debt-equity-history-analysis
debt-equity-history-analysis

A Look At Aytu Biopharma's Liabilities

Zooming in on the latest balance sheet data, we can see that Aytu Biopharma had liabilities of US$109.4m due within 12 months and liabilities of US$18.7m due beyond that. On the other hand, it had cash of US$49.6m and US$28.2m worth of receivables due within a year. So it has liabilities totalling US$50.3m more than its cash and near-term receivables, combined.

This deficit is considerable relative to its market capitalization of US$78.8m, so it does suggest shareholders should keep an eye on Aytu Biopharma's use of debt. Should its lenders demand that it shore up the balance sheet, shareholders would likely face severe dilution. Despite its noteworthy liabilities, Aytu Biopharma boasts net cash, so it's fair to say it does not have a heavy debt load! There's no doubt that we learn most about debt from the balance sheet. But it is future earnings, more than anything, that will determine Aytu Biopharma's ability to maintain a healthy balance sheet going forward. 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 Aytu Biopharma wasn't profitable at an EBIT level, but managed to grow its revenue by 138%, to US$66m. So there's no doubt that shareholders are cheering for growth

So How Risky Is Aytu Biopharma?

Statistically speaking companies that lose money are riskier than those that make money. And in the last year Aytu Biopharma had an earnings before interest and tax (EBIT) loss, truth be told. And over the same period it saw negative free cash outflow of US$33m and booked a US$58m accounting loss. However, it has net cash of US$24.9m, so it has a bit of time before it will need more capital. The good news for shareholders is that Aytu Biopharma has dazzling revenue growth, so there's a very good chance it can boost its free cash flow in the years to come. High growth pre-profit companies may well be risky, but they can also offer great rewards. 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. Case in point: We've spotted 3 warning signs for Aytu Biopharma you should be aware of, and 1 of them is a bit unpleasant.

If you're interested in investing in businesses that can grow profits without the burden of debt, then check out this free list of growing businesses that have net cash on the balance sheet.

This article by Simply Wall St is general in nature. We provide commentary based on historical data and analyst forecasts only using an unbiased methodology and our articles are not intended to be financial advice. 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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