Warren Buffett famously said, 'Volatility is far from synonymous with risk.' 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. As with many other companies Antares Pharma, Inc. (NASDAQ:ATRS) makes use of debt. But the real question is whether this debt is making the company risky.
When Is Debt A Problem?
Generally speaking, debt only becomes a real problem when a company can't easily pay it off, either by raising capital or with its own cash flow. In the worst case scenario, a company can go bankrupt if it cannot pay its creditors. 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, the upside of debt is that it often represents cheap capital, especially when it replaces dilution in a company with the ability to reinvest at high rates of return. When we think about a company's use of debt, we first look at cash and debt together.
How Much Debt Does Antares Pharma Carry?
The chart below, which you can click on for greater detail, shows that Antares Pharma had US$39.5m in debt in September 2020; about the same as the year before. However, its balance sheet shows it holds US$52.2m in cash, so it actually has US$12.6m net cash.
How Strong Is Antares Pharma's Balance Sheet?
The latest balance sheet data shows that Antares Pharma had liabilities of US$50.6m due within a year, and liabilities of US$39.8m falling due after that. Offsetting these obligations, it had cash of US$52.2m as well as receivables valued at US$51.3m due within 12 months. So it actually has US$13.1m 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$740.0m company is short on cash, but still worth keeping an eye on the balance sheet. Succinctly put, Antares Pharma boasts net cash, so it's fair to say it does not have a heavy debt load!
We also note that Antares Pharma improved its EBIT from a last year's loss to a positive US$13m. 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.
Finally, a company can only pay off debt with cold hard cash, not accounting profits. While Antares Pharma 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. In the last year, Antares Pharma's free cash flow amounted to 31% of its EBIT, less than we'd expect. That weak cash conversion makes it more difficult to handle indebtedness.
While we empathize with investors who find debt concerning, you should keep in mind that Antares Pharma has net cash of US$12.6m, as well as more liquid assets than liabilities. So we don't have any problem with Antares Pharma's use of debt. 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 3 warning signs we've spotted with Antares Pharma .
At the end of the day, it's often better to focus on companies that are free from net debt. You can access our special list of such companies (all with a track record of profit growth). It's free.
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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