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. 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, Antares Pharma, Inc. (NASDAQ:ATRS) does carry debt. But should shareholders be worried about its use of debt?
When Is Debt Dangerous?
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. 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. 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.
What Is Antares Pharma's Net Debt?
You can click the graphic below for the historical numbers, but it shows that as of September 2019 Antares Pharma had US$40.3m of debt, an increase on US$25.1m, over one year. However, its balance sheet shows it holds US$41.9m in cash, so it actually has US$1.61m net cash.
How Healthy Is Antares Pharma's Balance Sheet?
According to the last reported balance sheet, Antares Pharma had liabilities of US$33.9m due within 12 months, and liabilities of US$44.6m due beyond 12 months. Offsetting these obligations, it had cash of US$41.9m as well as receivables valued at US$40.1m due within 12 months. So it can boast US$3.49m more liquid assets than total liabilities.
This state of affairs indicates that Antares Pharma'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$506.0m company is short on cash, but still worth keeping an eye on the balance sheet. Simply put, the fact that Antares Pharma has more cash than debt is arguably a good indication that it can manage its debt safely. When analysing debt levels, the balance sheet is the obvious place to start. But ultimately the future profitability of the business will decide if Antares Pharma can strengthen its balance sheet over time. So if you want to see what the professionals think, you might find this free report on analyst profit forecasts to be interesting.
In the last year Antares Pharma wasn't profitable at an EBIT level, but managed to grow its revenue by 78%, to US$105m. Shareholders probably have their fingers crossed that it can grow its way to profits.
So How Risky Is Antares Pharma?
Statistically speaking companies that lose money are riskier than those that make money. And the fact is that over the last twelve months Antares Pharma lost money at the earnings before interest and tax (EBIT) line. And over the same period it saw negative free cash outflow of US$18m and booked a US$588k accounting loss. However, it has net cash of US$1.61m, so it has a bit of time before it will need more capital. With very solid revenue growth in the last year, Antares Pharma may be on a path to profitability. By investing before those profits, shareholders take on more risk in the hope of bigger rewards. 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. To that end, you should be aware of the 2 warning signs we've spotted with Antares Pharma .
Of course, if you're the type of investor who prefers buying stocks without the burden of debt, then don't hesitate to discover our exclusive list of net cash growth stocks, today.
If you spot an error that warrants correction, please contact the editor at email@example.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.
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