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

Simply Wall St

Some say volatility, rather than debt, is the best way to think about risk as an investor, but Warren Buffett famously said that 'Volatility is far from synonymous with risk.' When we think about how risky a company is, we always like to look at its use of debt, since debt overload can lead to ruin. We note that Amphastar Pharmaceuticals, Inc. (NASDAQ:AMPH) does have debt on its balance sheet. But should shareholders be worried about its use of debt?

When Is Debt Dangerous?

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. If things get really bad, the lenders can take control of the business. 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, plenty of companies use debt to fund growth, without any negative consequences. When we examine debt levels, we first consider both cash and debt levels, together.

View our latest analysis for Amphastar Pharmaceuticals

What Is Amphastar Pharmaceuticals's Net Debt?

The image below, which you can click on for greater detail, shows that Amphastar Pharmaceuticals had debt of US$46.7m at the end of June 2019, a reduction from US$52.6m over a year. However, it does have US$123.2m in cash offsetting this, leading to net cash of US$76.5m.

NasdaqGS:AMPH Historical Debt, August 22nd 2019

A Look At Amphastar Pharmaceuticals's Liabilities

The latest balance sheet data shows that Amphastar Pharmaceuticals had liabilities of US$101.0m due within a year, and liabilities of US$68.0m falling due after that. Offsetting these obligations, it had cash of US$123.2m as well as receivables valued at US$49.0m due within 12 months. So these liquid assets roughly match the total liabilities.

This state of affairs indicates that Amphastar Pharmaceuticals's balance sheet looks quite solid, as its total liabilities are just about equal to its liquid assets. So it's very unlikely that the US$1.07b company is short on cash, but still worth keeping an eye on the balance sheet. Simply put, the fact that Amphastar Pharmaceuticals has more cash than debt is arguably a good indication that it can manage its debt safely.

It was also good to see that despite losing money on the EBIT line last year, Amphastar Pharmaceuticals turned things around in the last 12 months, delivering and EBIT of US$1.9m. The balance sheet is clearly the area to focus on when you are analysing debt. But it is future earnings, more than anything, that will determine Amphastar Pharmaceuticals'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.

Finally, while the tax-man may adore accounting profits, lenders only accept cold hard cash. Amphastar Pharmaceuticals may have net cash on the balance sheet, but it is still interesting to look at how well the business converts its earnings before interest and tax (EBIT) to free cash flow, because that will influence both its need for, and its capacity to manage debt. Over the last year, Amphastar Pharmaceuticals actually produced more free cash flow than EBIT. That sort of strong cash generation warms our hearts like a puppy in a bumblebee suit.

Summing up

While it is always sensible to investigate a company's debt, in this case Amphastar Pharmaceuticals has US$76m in net cash and a decent-looking balance sheet. The cherry on top was that in converted 1410% of that EBIT to free cash flow, bringing in US$27m. So we don't think Amphastar Pharmaceuticals's use of debt is risky. We'd be very excited to see if Amphastar Pharmaceuticals insiders have been snapping up shares. If you are too, then click on this link right now to take a (free) peek at our list of reported insider transactions.

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.

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.