NASDAQ:AYTU) does have debt on its balance sheet. But should shareholders be worried about its use of debt?” data-reactid=”28″>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 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. We note that Aytu BioScience, Inc. (NASDAQ:AYTU) does have debt on its balance sheet. But should shareholders be worried about its use of debt?
When Is Debt Dangerous?
Debt assists a business until the business has trouble paying it off, either with new capital or with free cash flow. Part and parcel of capitalism is the process of ‘creative destruction’ where failed businesses are mercilessly liquidated by their bankers. However, a more common (but still painful) scenario is that it has to raise new equity capital at a low price, thus permanently diluting shareholders. 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. The first thing to do when considering how much debt a business uses is to look at its cash and debt together.
View our latest analysis for Aytu BioScience ” data-reactid=”31″>View our latest analysis for Aytu BioScience
How Much Debt Does Aytu BioScience Carry?
The image below, which you can click on for greater detail, shows that Aytu BioScience had debt of US$3.62m at the end of March 2020, a reduction from US$5.13m over a year. However, it does have US$62.3m in cash offsetting this, leading to net cash of US$58.6m.
A Look At Aytu BioScience’s Liabilities
We can see from the most recent balance sheet that Aytu BioScience had liabilities of US$42.0m falling due within a year, and liabilities of US$31.2m due beyond that. Offsetting these obligations, it had cash of US$62.3m as well as receivables valued at US$10.2m due within 12 months. So its total liabilities are just about perfectly matched by its shorter-term, liquid assets.
report showing analyst profit forecasts.” data-reactid=”52″>Having regard to Aytu BioScience’s size, it seems that its liquid assets are well balanced with its total liabilities. So it’s very unlikely that the US$155.1m company is short on cash, but still worth keeping an eye on the balance sheet. While it does have liabilities worth noting, Aytu BioScience also has more cash than debt, so we’re pretty confident it can manage its debt safely. 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 Aytu BioScience 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, Aytu BioScience reported revenue of US$14m, which is a gain of 122%, although it did not report any earnings before interest and tax. So its pretty obvious shareholders are hoping for more growth!
So How Risky Is Aytu BioScience?
Aytu BioScience is showing 2 warning signs in our investment analysis , and 1 of those is potentially serious…” data-reactid=”55″>Statistically speaking companies that lose money are riskier than those that make money. And the fact is that over the last twelve months Aytu BioScience lost money at the earnings before interest and tax (EBIT) line. Indeed, in that time it burnt through US$29.9m of cash and made a loss of US$25.0m. However, it has net cash of US$58.6m, so it has a bit of time before it will need more capital. Importantly, Aytu BioScience’s revenue growth is hot to trot. High growth pre-profit companies may well be risky, but they can also offer great rewards. 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. Be aware that Aytu BioScience is showing 2 warning signs in our investment analysis , and 1 of those is potentially serious…
list of growing businesses that have net cash on the balance sheet.” data-reactid=”60″>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.
Get in touch with us directly. Alternatively, email [email protected].” data-reactid=”61″>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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