Yahoo Finance Health Check: How Prudently Does Allergy Therapeutics (LON:AGY) Use Debt?
Some say volatility, rather than debt, is the best way to think about risk as an investor, but Warren Buffett famously said that '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. We can see that Allergy Therapeutics plc (LON:AGY) does use debt in its business. But should shareholders be worried about its use of debt?
When Is Debt A Problem?
Debt and other liabilities become risky for a business when it cannot easily fulfill those obligations, either with free cash flow or by raising capital at an attractive price. Ultimately, if the company can't fulfill its legal obligations to repay debt, shareholders could walk away with nothing. 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, debt can be an important tool in businesses, particularly capital heavy businesses. When we think about a company's use of debt, we first look at cash and debt together.
See our latest analysis for Allergy Therapeutics
How Much Debt Does Allergy Therapeutics Carry?
As you can see below, Allergy Therapeutics had UK£2.76m of debt at December 2018, down from UK£3.19m a year prior. But it also has UK£31.6m in cash to offset that, meaning it has UK£28.9m net cash.
How Healthy Is Allergy Therapeutics's Balance Sheet?
Zooming in on the latest balance sheet data, we can see that Allergy Therapeutics had liabilities of UK£13.6m due within 12 months and liabilities of UK£13.2m due beyond that. On the other hand, it had cash of UK£31.6m and UK£10.3m worth of receivables due within a year. So it can boast UK£15.2m more liquid assets than total liabilities.
It's good to see that Allergy Therapeutics has plenty of liquidity on its balance sheet, suggesting conservative management of liabilities. Due to its strong net asset position, it is not likely to face issues with its lenders. Succinctly put, Allergy Therapeutics boasts net cash, so it's fair to say it does not have a heavy debt load! When analysing debt levels, the balance sheet is the obvious place to start. But ultimately the future profitability of the business will decide if Allergy Therapeutics 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, Allergy Therapeutics reported revenue of UK£73m, which is a gain of 10%. We usually like to see faster growth from unprofitable companies, but each to their own.
So How Risky Is Allergy Therapeutics?
We have no doubt that loss making companies are, in general, riskier than profitable ones. And we do note that Allergy Therapeutics had negative earnings before interest and tax (EBIT), over the last year. Indeed, in that time it burnt through UK£3.6m of cash and made a loss of UK£3.2m. But the saving grace is the UK£32m on the balance sheet. That means it could keep spending at its current rate for more than five years. Overall, its balance sheet doesn't seem overly risky, at the moment, but we're always cautious until we see the positive free cash flow. When I consider a company to be a bit risky, I think it is responsible to check out whether insiders have been reporting any share sales. Luckily, you can click here ito see our graphic depicting Allergy Therapeutics insider transactions.
When all is said and done, sometimes its easier to focus on companies that don't even need debt. Readers can access a list of growth stocks with zero net debt 100% free, right now.
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