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Does Bioanalytical Systems (NASDAQ:BASI) Have A Healthy Balance Sheet?

Simply Wall St

The external fund manager backed by Berkshire Hathaway's Charlie Munger, Li Lu, makes no bones about it when he says '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. As with many other companies Bioanalytical Systems, Inc. (NASDAQ:BASI) makes use of debt. But should shareholders be worried about its use of debt?

Why Does Debt Bring Risk?

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. Part and parcel of capitalism is the process of 'creative destruction' where failed businesses are mercilessly liquidated by their bankers. 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. By replacing dilution, though, debt can be an extremely good tool for businesses that need capital to invest in growth at high rates of return. The first thing to do when considering how much debt a business uses is to look at its cash and debt together.

Check out our latest analysis for Bioanalytical Systems

What Is Bioanalytical Systems's Debt?

The image below, which you can click on for greater detail, shows that at June 2019 Bioanalytical Systems had debt of US$14.3m, up from US$4.33m in one year. However, because it has a cash reserve of US$506.0k, its net debt is less, at about US$13.8m.

NasdaqCM:BASI Historical Debt, September 29th 2019
NasdaqCM:BASI Historical Debt, September 29th 2019

How Strong Is Bioanalytical Systems's Balance Sheet?

Zooming in on the latest balance sheet data, we can see that Bioanalytical Systems had liabilities of US$16.0m due within 12 months and liabilities of US$12.3m due beyond that. Offsetting this, it had US$506.0k in cash and US$7.90m in receivables that were due within 12 months. So it has liabilities totalling US$19.9m more than its cash and near-term receivables, combined.

While this might seem like a lot, it is not so bad since Bioanalytical Systems has a market capitalization of US$38.7m, and so it could probably strengthen its balance sheet by raising capital if it needed to. But it's clear that we should definitely closely examine whether it can manage its debt without dilution. There's no doubt that we learn most about debt from the balance sheet. But it is Bioanalytical Systems's earnings that will influence how the balance sheet holds up in the future. So when considering debt, it's definitely worth looking at the earnings trend. Click here for an interactive snapshot.

Over 12 months, Bioanalytical Systems reported revenue of US$38m, which is a gain of 63%, although it did not report any earnings before interest and tax. With any luck the company will be able to grow its way to profitability.

Caveat Emptor

Despite the top line growth, Bioanalytical Systems still had negative earnings before interest and tax (EBIT), over the last year. To be specific the EBIT loss came in at US$337k. When we look at that and recall the liabilities on its balance sheet, relative to cash, it seems unwise to us for the company to have any debt. Quite frankly we think the balance sheet is far from match-fit, although it could be improved with time. Another cause for caution is that is bled US$2.1m in negative free cash flow over the last twelve months. So in short it's a really risky stock. For riskier companies like Bioanalytical Systems I always like to keep an eye on whether insiders are buying or selling. So click here if you want to find out for yourself.

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.

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.