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Does Amphastar Pharmaceuticals (NASDAQ:AMPH) Have A Healthy Balance Sheet?

·4 min read

Legendary fund manager Li Lu (who Charlie Munger backed) once said, 'The biggest investment risk is not the volatility of prices, but whether you will suffer a 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 Amphastar Pharmaceuticals, Inc. (NASDAQ:AMPH) does use debt in its business. But should shareholders be worried about its use of debt?

What Risk Does Debt Bring?

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. 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.

View our latest analysis for Amphastar Pharmaceuticals

How Much Debt Does Amphastar Pharmaceuticals Carry?

You can click the graphic below for the historical numbers, but it shows that as of September 2021 Amphastar Pharmaceuticals had US$77.3m of debt, an increase on US$44.5m, over one year. But it also has US$114.6m in cash to offset that, meaning it has US$37.3m net cash.


How Healthy Is Amphastar Pharmaceuticals' Balance Sheet?

We can see from the most recent balance sheet that Amphastar Pharmaceuticals had liabilities of US$98.0m falling due within a year, and liabilities of US$123.5m due beyond that. Offsetting this, it had US$114.6m in cash and US$78.6m in receivables that were due within 12 months. So its liabilities outweigh the sum of its cash and (near-term) receivables by US$28.3m.

Of course, Amphastar Pharmaceuticals has a market capitalization of US$1.04b, so these liabilities are probably manageable. Having said that, it's clear that we should continue to monitor its balance sheet, lest it change for the worse. Despite its noteworthy liabilities, Amphastar Pharmaceuticals boasts net cash, so it's fair to say it does not have a heavy debt load!

Better yet, Amphastar Pharmaceuticals grew its EBIT by 582% last year, which is an impressive improvement. If maintained that growth will make the debt even more manageable in the years ahead. When analysing debt levels, the balance sheet is the obvious place to start. But ultimately the future profitability of the business will decide if Amphastar Pharmaceuticals 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, a business needs free cash flow to pay off debt; accounting profits just don't cut it. While Amphastar Pharmaceuticals 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, Amphastar Pharmaceuticals recorded free cash flow worth a fulsome 96% of its EBIT, which is stronger than we'd usually expect. That puts it in a very strong position to pay down debt.

Summing up

We could understand if investors are concerned about Amphastar Pharmaceuticals's liabilities, but we can be reassured by the fact it has has net cash of US$37.3m. The cherry on top was that in converted 96% of that EBIT to free cash flow, bringing in US$45m. So we don't think Amphastar Pharmaceuticals's use of debt is risky. Another factor that would give us confidence in Amphastar Pharmaceuticals would be if insiders have been buying shares: if you're conscious of that signal too, you can find out instantly by clicking this link.

When all is said and done, sometimes its easier to focus on companies that don't even need debt. Readers can access a list of growth stocks with zero net debt 100% free, right now.

Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team (at) simplywallst.com.

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.