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. 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 ADMA Biologics, Inc. (NASDAQ:ADMA) makes use of debt. But is this debt a concern to shareholders?
When Is Debt Dangerous?
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. Ultimately, if the company can't fulfill its legal obligations to repay debt, shareholders could walk away with nothing. However, a more frequent (but still costly) occurrence is where a company must issue shares at bargain-basement prices, permanently diluting shareholders, just to shore up its balance sheet. 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 ADMA Biologics's Net Debt?
As you can see below, at the end of September 2019, ADMA Biologics had US$82.7m of debt, up from US$41.2m a year ago. Click the image for more detail. However, it also had US$48.0m in cash, and so its net debt is US$34.7m.
A Look At ADMA Biologics's Liabilities
The latest balance sheet data shows that ADMA Biologics had liabilities of US$15.2m due within a year, and liabilities of US$86.5m falling due after that. Offsetting this, it had US$48.0m in cash and US$7.32m in receivables that were due within 12 months. So its liabilities outweigh the sum of its cash and (near-term) receivables by US$46.3m.
Since publicly traded ADMA Biologics shares are worth a total of US$268.1m, it seems unlikely that this level of liabilities would be a major threat. But there are sufficient liabilities that we would certainly recommend shareholders continue to monitor the balance sheet, going forward. The balance sheet is clearly the area to focus on when you are analysing debt. But ultimately the future profitability of the business will decide if ADMA Biologics can strengthen its balance sheet over time. So if you're focused on the future you can check out this free report showing analyst profit forecasts.
Over 12 months, ADMA Biologics made a loss at the EBIT level, and saw its revenue drop to US$21m, which is a fall of 14%. We would much prefer see growth.
Not only did ADMA Biologics's revenue slip over the last twelve months, but it also produced negative earnings before interest and tax (EBIT). Indeed, it lost a very considerable US$50m at the EBIT level. Considering that alongside the liabilities mentioned above does not give us much confidence that company should be using so much debt. Quite frankly we think the balance sheet is far from match-fit, although it could be improved with time. However, it doesn't help that it burned through US$78m of cash over the last year. So in short it's a really risky stock. For riskier companies like ADMA Biologics 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 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.
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