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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. Importantly, BioDelivery Sciences International, Inc. (NASDAQ:BDSI) does carry debt. But the real question is whether this debt is making the company risky.
When Is Debt A Problem?
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. 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, debt can be an important tool in businesses, particularly capital heavy businesses. The first thing to do when considering how much debt a business uses is to look at its cash and debt together.
What Is BioDelivery Sciences International's Debt?
As you can see below, BioDelivery Sciences International had US$78.6m of debt, at June 2021, which is about the same as the year before. You can click the chart for greater detail. But on the other hand it also has US$119.9m in cash, leading to a US$41.2m net cash position.
A Look At BioDelivery Sciences International's Liabilities
According to the last reported balance sheet, BioDelivery Sciences International had liabilities of US$63.9m due within 12 months, and liabilities of US$72.5m due beyond 12 months. On the other hand, it had cash of US$119.9m and US$52.9m worth of receivables due within a year. So it can boast US$36.3m more liquid assets than total liabilities.
This short term liquidity is a sign that BioDelivery Sciences International could probably pay off its debt with ease, as its balance sheet is far from stretched. Succinctly put, BioDelivery Sciences International boasts net cash, so it's fair to say it does not have a heavy debt load!
Pleasingly, BioDelivery Sciences International is growing its EBIT faster than former Australian PM Bob Hawke downs a yard glass, boasting a 137% gain in the last twelve months. When analysing debt levels, the balance sheet is the obvious place to start. But it is future earnings, more than anything, that will determine BioDelivery Sciences International'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.
Finally, a company can only pay off debt with cold hard cash, not accounting profits. 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. During the last two years, BioDelivery Sciences International generated free cash flow amounting to a very robust 99% of its EBIT, more than we'd expect. That positions it well to pay down debt if desirable to do so.
While it is always sensible to investigate a company's debt, in this case BioDelivery Sciences International has US$41.2m in net cash and a decent-looking balance sheet. The cherry on top was that in converted 99% of that EBIT to free cash flow, bringing in US$40m. So is BioDelivery Sciences International's debt a risk? It doesn't seem so to us. There's no doubt that we learn most about debt from the balance sheet. However, not all investment risk resides within the balance sheet - far from it. We've identified 1 warning sign with BioDelivery Sciences International , and understanding them should be part of your investment process.
If you're interested in investing in businesses that can grow profits without the burden of debt, then check out this free list of growing businesses that have net cash on the balance sheet.
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.
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