Warren Buffett famously said, 'Volatility is far from synonymous with risk.' It's only natural to consider a company's balance sheet when you examine how risky it is, since debt is often involved when a business collapses. Importantly, Emergent BioSolutions Inc. (NYSE:EBS) does carry debt. But should shareholders be worried about its use of debt?
What Risk Does Debt Bring?
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. 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, 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. When we think about a company's use of debt, we first look at cash and debt together.
What Is Emergent BioSolutions's Debt?
You can click the graphic below for the historical numbers, but it shows that Emergent BioSolutions had US$662.6m of debt in September 2024, down from US$861.8m, one year before. However, it also had US$149.9m in cash, and so its net debt is US$512.7m.
How Healthy Is Emergent BioSolutions' Balance Sheet?
According to the last reported balance sheet, Emergent BioSolutions had liabilities of US$229.9m due within 12 months, and liabilities of US$739.5m due beyond 12 months. Offsetting this, it had US$149.9m in cash and US$121.3m in receivables that were due within 12 months. So its liabilities total US$698.2m more than the combination of its cash and short-term receivables.
Given this deficit is actually higher than the company's market capitalization of US$637.7m, we think shareholders really should watch Emergent BioSolutions's debt levels, like a parent watching their child ride a bike for the first time. Hypothetically, extremely heavy dilution would be required if the company were forced to pay down its liabilities by raising capital at the current share price. 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 Emergent BioSolutions 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.
Over 12 months, Emergent BioSolutions reported revenue of US$1.1b, which is a gain of 2.0%, although it did not report any earnings before interest and tax. We usually like to see faster growth from unprofitable companies, but each to their own.
Caveat Emptor
Importantly, Emergent BioSolutions had an earnings before interest and tax (EBIT) loss over the last year. Indeed, it lost a very considerable US$114m at the EBIT level. When we look at that alongside the significant liabilities, we're not particularly confident about the company. It would need to improve its operations quickly for us to be interested in it. For example, we would not want to see a repeat of last year's loss of US$209m. In the meantime, we consider the stock to be risky. The balance sheet is clearly the area to focus on when you are analysing debt. However, not all investment risk resides within the balance sheet - far from it. For example Emergent BioSolutions has 2 warning signs (and 1 which shouldn't be ignored) we think you should know about.
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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