Is Amphastar Pharmaceuticals (NASDAQ:AMPH) Using Too Much Debt?

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 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. We note that Amphastar Pharmaceuticals, Inc. (NASDAQ:AMPH) does have debt on its balance sheet. But the real question is whether this debt is making the company risky.

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. The first step when considering a company's debt levels is to consider its cash and debt together.

See our latest analysis for Amphastar Pharmaceuticals

What Is Amphastar Pharmaceuticals's Net Debt?

The chart below, which you can click on for greater detail, shows that Amphastar Pharmaceuticals had US$45.9m in debt in December 2020; about the same as the year before. However, it does have US$105.6m in cash offsetting this, leading to net cash of US$59.7m.

How Strong Is Amphastar Pharmaceuticals' Balance Sheet?

According to the last reported balance sheet, Amphastar Pharmaceuticals had liabilities of US$112.2m due within 12 months, and liabilities of US$70.3m due beyond 12 months. Offsetting this, it had US$105.6m in cash and US$66.4m in receivables that were due within 12 months. So its liabilities outweigh the sum of its cash and (near-term) receivables by US$10.5m.

Having regard to Amphastar Pharmaceuticals' size, it seems that its liquid assets are well balanced with its total liabilities. So it's very unlikely that the US$843.4m company is short on cash, but still worth keeping an eye on the balance sheet. While it does have liabilities worth noting, Amphastar Pharmaceuticals also has more cash than debt, so we're pretty confident it can manage its debt safely.

Even more impressive was the fact that Amphastar Pharmaceuticals grew its EBIT by 20,213% over twelve months. That boost will make it even easier to pay down debt going forward. There's no doubt that we learn most about debt from the balance sheet. But it is future earnings, more than anything, that will determine Amphastar Pharmaceuticals's ability to maintain a healthy balance sheet going forward. So if you want to see what the professionals think, you might find this free report on analyst profit forecasts to be interesting.

Finally, a business needs free cash flow to pay off debt; accounting profits just don't cut it. Amphastar Pharmaceuticals may have net cash on the balance sheet, but it is still interesting to look at how well the business converts its earnings before interest and tax (EBIT) to free cash flow, because that will influence both its need for, and its capacity to manage debt. Happily for any shareholders, Amphastar Pharmaceuticals actually produced more free cash flow than EBIT over the last two years. That sort of strong cash conversion gets us as excited as the crowd when the beat drops at a Daft Punk concert.

Summing up

We could understand if investors are concerned about Amphastar Pharmaceuticals's liabilities, but we can be reassured by the fact it has has net cash of US$59.7m. The cherry on top was that in converted 149% of that EBIT to free cash flow, bringing in US$23m. So is Amphastar Pharmaceuticals's debt a risk? It doesn't seem so to us. The balance sheet is clearly the area to focus on when you are analysing debt. But ultimately, every company can contain risks that exist outside of the balance sheet. Case in point: We've spotted 3 warning signs for Amphastar Pharmaceuticals you should be aware of.

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.

This article by Simply Wall St is general in nature. It does not constitute a recommendation to buy or sell any stock, and does not take account of your objectives, or your financial situation. We aim to bring you long-term focused analysis driven by fundamental data. Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative material. Simply Wall St has no position in any stocks mentioned.

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