Warren Buffett famously said, ‘Volatility is far from synonymous with risk.’ 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. Importantly, ANI Pharmaceuticals, Inc. (NASDAQ:ANIP) does carry debt. But the real question is whether this debt is making the company risky.
Why Does Debt Bring Risk?
Debt assists a business until the business has trouble paying it off, either with new capital or with free cash flow. Ultimately, if the company can’t fulfill its legal obligations to repay debt, shareholders could walk away with nothing. 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. The first thing to do when considering how much debt a business uses is to look at its cash and debt together.
How Much Debt Does ANI Pharmaceuticals Carry?
As you can see below, ANI Pharmaceuticals had US$191.5m of debt at March 2021, down from US$213.3m a year prior. On the flip side, it has US$25.1m in cash leading to net debt of about US$166.5m.
How Healthy Is ANI Pharmaceuticals’ Balance Sheet?
Zooming in on the latest balance sheet data, we can see that ANI Pharmaceuticals had liabilities of US$82.8m due within 12 months and liabilities of US$177.4m due beyond that. Offsetting these obligations, it had cash of US$25.1m as well as receivables valued at US$91.9m due within 12 months. So it has liabilities totalling US$143.2m more than its cash and near-term receivables, combined.
While this might seem like a lot, it is not so bad since ANI Pharmaceuticals has a market capitalization of US$425.0m, and so it could probably strengthen its balance sheet by raising capital if it needed to. But it’s clear that we should definitely closely examine whether it can manage its debt without dilution.
We use two main ratios to inform us about debt levels relative to earnings. The first is net debt divided by earnings before interest, tax, depreciation, and amortization (EBITDA), while the second is how many times its earnings before interest and tax (EBIT) covers its interest expense (or its interest cover, for short). Thus we consider debt relative to earnings both with and without depreciation and amortization expenses.
While we wouldn’t worry about ANI Pharmaceuticals’s net debt to EBITDA ratio of 3.3, we think its super-low interest cover of 0.64 times is a sign of high leverage. In large part that’s due to the company’s significant depreciation and amortisation charges, which arguably mean its EBITDA is a very generous measure of earnings, and its debt may be more of a burden than it first appears. It seems clear that the cost of borrowing money is negatively impacting returns for shareholders, of late. Worse, ANI Pharmaceuticals’s EBIT was down 54% over the last year. If earnings continue to follow that trajectory, paying off that debt load will be harder than convincing us to run a marathon in the rain. There’s no doubt that we learn most about debt from the balance sheet. But ultimately the future profitability of the business will decide if ANI Pharmaceuticals 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.
Finally, a company can only pay off debt with cold hard cash, not accounting profits. So we always check how much of that EBIT is translated into free cash flow. Looking at the most recent three years, ANI Pharmaceuticals recorded free cash flow of 35% of its EBIT, which is weaker than we’d expect. That weak cash conversion makes it more difficult to handle indebtedness.
On the face of it, ANI Pharmaceuticals’s interest cover left us tentative about the stock, and its EBIT growth rate was no more enticing than the one empty restaurant on the busiest night of the year. Having said that, its ability to handle its total liabilities isn’t such a worry. Overall, we think it’s fair to say that ANI Pharmaceuticals has enough debt that there are some real risks around the balance sheet. If everything goes well that may pay off but the downside of this debt is a greater risk of permanent losses. The balance sheet is clearly the area to focus on when you are analysing debt. But ultimately, every company can contain risks that exist outside of the balance sheet. Case in point: We’ve spotted 1 warning sign for ANI Pharmaceuticals you should be aware of.
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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