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. 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. As with many other companies AMAG Pharmaceuticals, Inc. (NASDAQ:AMAG) makes use of debt. But the more important question is: how much risk is that debt creating?
When Is Debt Dangerous?
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. In the worst case scenario, a company can go bankrupt if it cannot pay its creditors. 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, plenty of companies use debt to fund growth, without any negative consequences. When we think about a company's use of debt, we first look at cash and debt together.
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What Is AMAG Pharmaceuticals's Net Debt?
The image below, which you can click on for greater detail, shows that AMAG Pharmaceuticals had debt of US$269.3m at the end of June 2019, a reduction from US$742.5m over a year. However, it also had US$261.0m in cash, and so its net debt is US$8.26m.
How Healthy Is AMAG Pharmaceuticals's Balance Sheet?
According to the last reported balance sheet, AMAG Pharmaceuticals had liabilities of US$246.3m due within 12 months, and liabilities of US$278.4m due beyond 12 months. Offsetting these obligations, it had cash of US$261.0m as well as receivables valued at US$83.2m due within 12 months. So its liabilities total US$180.5m more than the combination of its cash and short-term receivables.
While this might seem like a lot, it is not so bad since AMAG Pharmaceuticals has a market capitalization of US$410.3m, and so it could probably strengthen its balance sheet by raising capital if it needed to. However, it is still worthwhile taking a close look at its ability to pay off debt. The balance sheet is clearly the area to focus on when you are analysing debt. But ultimately the future profitability of the business will decide if AMAG Pharmaceuticals 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, AMAG Pharmaceuticals made a loss at the EBIT level, and saw its revenue drop to US$364m, which is a fall of 29%. To be frank that doesn't bode well.