Berkshire Hathaway’s Charlie Munger-backed outside fund manager Li Lu is quick to say, “The biggest risk in investing isn’t price volatility, but whether you’re going to suffer a permanent loss of capital “. It’s natural to consider a company’s balance sheet when looking at its riskiness, as debt is often involved when a company fails. We can see that Avid Bioservices, Inc. (NASDAQ:CDMO) uses debt in its business. But the more important question is: what risk does this debt create?
What risk does debt carry?
Generally speaking, debt only becomes a real problem when a company cannot easily repay it, either by raising capital or with its own cash flow. In the worst case, a company can go bankrupt if it cannot pay its creditors. However, a more usual (but still expensive) situation is when a company has to dilute shareholders at a cheap share price just to keep debt under control. By replacing dilution, however, debt can be a great tool for companies that need capital to invest in growth at high rates of return. The first step when considering a company’s debt levels is to consider its cash and debt together.
Check out our latest analysis for Avid Bioservices
What is Avid Bioservices debt?
The image below, which you can click on for more details, shows that in January 2022, Avid Bioservices had $139.3 million in debt, up from none in a year. But he also has $150.0 million in cash to offset that, which means he has $10.6 million in net cash.
How healthy is Avid Bioservices’ balance sheet?
The latest balance sheet data shows that Avid Bioservices had liabilities of $77.3 million due within the year, and liabilities of $180.2 million due thereafter. In compensation for these obligations, it had cash of US$150.0 million as well as receivables valued at US$31.4 million and maturing within 12 months. It therefore has liabilities totaling $76.2 million more than its cash and short-term receivables, combined.
Given that publicly traded Avid Bioservices shares are worth a total of US$850.2 million, it seems unlikely that this level of liability is a major threat. But there are enough liabilities that we certainly recommend that shareholders continue to monitor the balance sheet in the future. While it has liabilities to note, Avid Bioservices also has more cash than debt, so we’re pretty confident it can manage its debt safely.
Fortunately, Avid Bioservices is growing its EBIT faster than former Australian Prime Minister Bob Hawke downed a yard glass, with a 303% gain over the last twelve months. When analyzing debt levels, the balance sheet is the obvious starting point. But it is future revenues, more than anything, that will determine Avid Bioservices’ ability to maintain a healthy balance sheet in the future. So if you want to see what the professionals think, you might find this free analyst earnings forecast report interesting.
Finally, a business needs free cash flow to pay off its debts; book profits are not enough. Although Avid Bioservices has net cash on its balance sheet, it’s always worth looking at its ability to convert earnings before interest and taxes (EBIT) to free cash flow, to help us understand how quickly it’s building (or erodes) that treasury. balance. Over the past two years, Avid Bioservices has generated free cash flow of 2.7% of EBIT, an uninspiring performance. This low level of cash conversion compromises its ability to manage and repay its debt.
We can understand that investors are worried about Avid Bioservices’ liabilities, but we can take comfort in the fact that it has a net cash position of $10.6 million. And it has impressed us with its 303% EBIT growth over the past year. So we have no problem with Avid Bioservices’ use of debt. The balance sheet is clearly the area to focus on when analyzing debt. But at the end of the day, every business can contain risks that exist outside of the balance sheet. For example, we found 2 warning signs for Avid Bioservices (1 is potentially serious!) which you should be aware of before investing here.
If you are interested in investing in businesses that can generate profits without the burden of debt, then check out this free list of growing companies that have net cash on the balance sheet.
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This Simply Wall St article is general in nature. We provide commentary based on historical data and analyst forecasts only using unbiased methodology and our articles are not intended to be financial advice. It is not a recommendation to buy or sell stocks and does not take into account your objectives or financial situation. Our goal is to bring you targeted long-term analysis based on fundamental data. Note that our analysis may not take into account the latest announcements from price-sensitive companies or qualitative materials. Simply Wall St has no position in the stocks mentioned.