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 seems the smart money knows that debt – which is usually involved in bankruptcies – is a very important factor, when you assess how risky a company is. As with many other companies Biotage AB (publ) (STO:BIOT) makes use of debt. But should shareholders be worried about its use of debt?
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. If things get really bad, the lenders can take control of the business. 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. When we think about a company's use of debt, we first look at cash and debt together.
Check out our latest analysis for Biotage
As you can see below, at the end of June 2022, Biotage had kr199.0m of debt, up from kr45.9m a year ago. Click the image for more detail. But on the other hand it also has kr312.0m in cash, leading to a kr113.0m net cash position.
The latest balance sheet data shows that Biotage had liabilities of kr371.0m due within a year, and liabilities of kr306.0m falling due after that. Offsetting this, it had kr312.0m in cash and kr302.0m in receivables that were due within 12 months. So its liabilities outweigh the sum of its cash and (near-term) receivables by kr63.0m.
Having regard to Biotage's size, it seems that its liquid assets are well balanced with its total liabilities. So it's very unlikely that the kr11.8b company is short on cash, but still worth keeping an eye on the balance sheet. Despite its noteworthy liabilities, Biotage boasts net cash, so it's fair to say it does not have a heavy debt load!
Another good sign is that Biotage has been able to increase its EBIT by 30% in twelve months, making it easier to pay down debt. 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 Biotage 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.
But our final consideration is also important, because a company cannot pay debt with paper profits; it needs cold hard cash. Biotage may have net cash on the balance sheet, but it is still interesting to look at how well the business converts its earnings before interest and tax (EBIT) to free cash flow, because that will influence both its need for, and its capacity to manage debt. Over the last three years, Biotage actually produced more free cash flow than EBIT. That sort of strong cash conversion gets us as excited as the crowd when the beat drops at a Daft Punk concert.
We could understand if investors are concerned about Biotage's liabilities, but we can be reassured by the fact it has has net cash of kr113.0m. The cherry on top was that in converted 103% of that EBIT to free cash flow, bringing in kr285m. So we don't think Biotage's use of debt is risky. Over time, share prices tend to follow earnings per share, so if you're interested in Biotage, you may well want to click here to check an interactive graph of its earnings per share history.
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.
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Biotage AB (publ) provides separation technologies in the areas of organic and analytical chemistry, biomolecules, and industrial scale up applications.
The Snowflake is a visual investment summary with the score of each axis being calculated by 6 checks in 5 areas.
Read more about these checks in the individual report sections or in our analysis model.
Excellent balance sheet with moderate growth potential.
Simply Wall St's Editorial Team provides unbiased, factual reporting on global stocks using in-depth fundamental analysis.
Find out more about our editorial guidelines and team.
Biotage AB (publ) provides separation technologies in the areas of organic and analytical chemistry, biomolecules, and industrial scale up applications.
The Snowflake is a visual investment summary with the score of each axis being calculated by 6 checks in 5 areas.
Read more about these checks in the individual report sections or in our analysis model.
Excellent balance sheet with moderate growth potential.
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