Howard Marks put it nicely when he said that, rather than worrying about share price volatility, ‘The possibility of permanent loss is the risk I worry about… and every practical investor I know worries about.’ 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 Puma Biotechnology, Inc. (NASDAQ:PBYI) makes use of debt. But the real question is whether this debt is making the company risky.
When Is Debt A Problem?
Debt assists a business until the business has trouble paying it off, either with new capital or with free cash flow. In the worst case scenario, a company can go bankrupt if it cannot pay its creditors. 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.
Check out our latest analysis for Puma Biotechnology
What Is Puma Biotechnology’s Net Debt?
The chart below, which you can click on for greater detail, shows that Puma Biotechnology had US$99.2m in debt in March 2021; about the same as the year before. But on the other hand it also has US$109.1m in cash, leading to a US$9.85m net cash position.
How Healthy Is Puma Biotechnology’s Balance Sheet?
According to the last reported balance sheet, Puma Biotechnology had liabilities of US$140.4m due within 12 months, and liabilities of US$101.8m due beyond 12 months. Offsetting this, it had US$109.1m in cash and US$26.2m in receivables that were due within 12 months. So its liabilities total US$107.0m more than the combination of its cash and short-term receivables.
This deficit isn’t so bad because Puma Biotechnology is worth US$435.9m, and thus could probably raise enough capital to shore up its balance sheet, if the need arose. But we definitely want to keep our eyes open to indications that its debt is bringing too much risk. While it does have liabilities worth noting, Puma Biotechnology also has more cash than debt, so we’re pretty confident it can manage its debt safely.
We also note that Puma Biotechnology improved its EBIT from a last year’s loss to a positive US$24m. When analysing debt levels, the balance sheet is the obvious place to start. But it is future earnings, more than anything, that will determine Puma Biotechnology’s ability to maintain a healthy balance sheet going forward. So if you’re focused on the future you can check out this free report showing analyst profit forecasts.
Finally, a business needs free cash flow to pay off debt; accounting profits just don’t cut it. While Puma Biotechnology 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. Looking at the most recent year, Puma Biotechnology recorded free cash flow of 33% of its EBIT, which is weaker than we’d expect. That’s not great, when it comes to paying down debt.
Summing up
While Puma Biotechnology does have more liabilities than liquid assets, it also has net cash of US$9.85m. So while Puma Biotechnology does not have a great balance sheet, it’s certainly not too bad. There’s no doubt that we learn most about debt from the balance sheet. But ultimately, every company can contain risks that exist outside of the balance sheet. We’ve identified 1 warning sign with Puma Biotechnology , and understanding them should be part of your investment process.
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.
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