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.' 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 can see that Athenex, Inc. (NASDAQ:ATNX) does use debt in its business. But the more important question is: how much risk is that debt creating?
What Risk Does Debt Bring?
Debt assists a business until the business has trouble paying it off, either with new capital or with free cash flow. Ultimately, if the company can't fulfill its legal obligations to repay debt, shareholders could walk away with nothing. 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. Having said that, the most common situation is where a company manages its debt reasonably well - and to its own advantage. The first thing to do when considering how much debt a business uses is to look at its cash and debt together.
How Much Debt Does Athenex Carry?
The image below, which you can click on for greater detail, shows that at June 2020 Athenex had debt of US$95.6m, up from US$50.3m in one year. But it also has US$116.3m in cash to offset that, meaning it has US$20.7m net cash.
A Look At Athenex's Liabilities
Zooming in on the latest balance sheet data, we can see that Athenex had liabilities of US$66.9m due within 12 months and liabilities of US$104.9m due beyond that. Offsetting this, it had US$116.3m in cash and US$47.1m in receivables that were due within 12 months. So it has liabilities totalling US$8.4m more than its cash and near-term receivables, combined.
Having regard to Athenex'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$1.19b company is struggling for cash, we still think it's worth monitoring its balance sheet. Despite its noteworthy liabilities, Athenex boasts net cash, so it's fair to say it does not have a heavy debt load! When analysing debt levels, the balance sheet is the obvious place to start. But it is future earnings, more than anything, that will determine Athenex's ability to maintain a healthy balance sheet going forward. So if you're focused on the future you can check out this free report showing analyst profit forecasts.
In the last year Athenex wasn't profitable at an EBIT level, but managed to grow its revenue by 61%, to US$141m. With any luck the company will be able to grow its way to profitability.
So How Risky Is Athenex?
Statistically speaking companies that lose money are riskier than those that make money. And the fact is that over the last twelve months Athenex lost money at the earnings before interest and tax (EBIT) line. And over the same period it saw negative free cash outflow of US$143.1m and booked a US$116.4m accounting loss. With only US$20.7m on the balance sheet, it would appear that its going to need to raise capital again soon. With very solid revenue growth in the last year, Athenex may be on a path to profitability. Pre-profit companies are often risky, but they can also offer great rewards. The balance sheet is clearly the area to focus on when you are analysing debt. But ultimately, every company can contain risks that exist outside of the balance sheet. Like risks, for instance. Every company has them, and we've spotted 3 warning signs for Athenex (of which 1 is significant!) you should know about.
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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