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Warren Buffett famously said, 'Volatility is far from synonymous with risk.' 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 BioDelivery Sciences International, Inc. (NASDAQ:BDSI) does use debt in its business. But the more important question is: how much risk is that debt creating?
When Is Debt A Problem?
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. In the worst case scenario, a company can go bankrupt if it cannot pay its creditors. 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, plenty of companies use debt to fund growth, without any negative consequences. When we think about a company's use of debt, we first look at cash and debt together.
What Is BioDelivery Sciences International's Debt?
You can click the graphic below for the historical numbers, but it shows that as of June 2020 BioDelivery Sciences International had US$78.3m of debt, an increase on US$58.5m, over one year. However, its balance sheet shows it holds US$91.0m in cash, so it actually has US$12.7m net cash.
How Healthy Is BioDelivery Sciences International's Balance Sheet?
Zooming in on the latest balance sheet data, we can see that BioDelivery Sciences International had liabilities of US$56.6m due within 12 months and liabilities of US$78.7m due beyond that. On the other hand, it had cash of US$91.0m and US$48.1m worth of receivables due within a year. So it can boast US$3.83m more liquid assets than total liabilities.
Having regard to BioDelivery Sciences International's size, it seems that its liquid assets are well balanced with its total liabilities. So while it's hard to imagine that the US$371.4m company is struggling for cash, we still think it's worth monitoring its balance sheet. Succinctly put, BioDelivery Sciences International boasts net cash, so it's fair to say it does not have a heavy debt load!
Notably, BioDelivery Sciences International made a loss at the EBIT level, last year, but improved that to positive EBIT of US$18m in the last twelve months. When analysing debt levels, the balance sheet is the obvious place to start. But ultimately the future profitability of the business will decide if BioDelivery Sciences International 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.
Finally, a business needs free cash flow to pay off debt; accounting profits just don't cut it. While BioDelivery Sciences International 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 year, BioDelivery Sciences International 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 BioDelivery Sciences International has US$12.7m in net cash and a decent-looking balance sheet. The cherry on top was that in converted 114% of that EBIT to free cash flow, bringing in US$20m. So we don't have any problem with BioDelivery Sciences International's use of debt. 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. Consider for instance, the ever-present spectre of investment risk. We've identified 5 warning signs with BioDelivery Sciences International , and understanding them should be part of your investment process.
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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