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. As with many other companies Bioanalytical Systems, Inc. (NASDAQ:BASI) makes use of debt. But should shareholders be worried about its use of debt?
Why Does Debt Bring Risk?
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. 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. By replacing dilution, though, debt can be an extremely good tool for businesses that need capital to invest in growth 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.
Check out our latest analysis for Bioanalytical Systems
What Is Bioanalytical Systems's Debt?
The image below, which you can click on for greater detail, shows that at June 2019 Bioanalytical Systems had debt of US$14.3m, up from US$4.33m in one year. However, because it has a cash reserve of US$506.0k, its net debt is less, at about US$13.8m.
How Strong Is Bioanalytical Systems's Balance Sheet?
Zooming in on the latest balance sheet data, we can see that Bioanalytical Systems had liabilities of US$16.0m due within 12 months and liabilities of US$12.3m due beyond that. Offsetting this, it had US$506.0k in cash and US$7.90m in receivables that were due within 12 months. So it has liabilities totalling US$19.9m more than its cash and near-term receivables, combined.
While this might seem like a lot, it is not so bad since Bioanalytical Systems has a market capitalization of US$38.7m, 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. There's no doubt that we learn most about debt from the balance sheet. But it is Bioanalytical Systems's earnings that will influence how the balance sheet holds up in the future. So when considering debt, it's definitely worth looking at the earnings trend. Click here for an interactive snapshot.