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.’ 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, Beyond Air, Inc. (NASDAQ:XAIR) does carry debt. But the real question is whether this debt is making the company risky.
What Risk Does Debt Bring?
Generally speaking, debt only becomes a real problem when a company can’t easily pay it off, either by raising capital or with its own cash flow. In the worst case scenario, a company can go bankrupt if it cannot pay its creditors. However, a more frequent (but still costly) occurrence is where a company must issue shares at bargain-basement prices, permanently diluting shareholders, just to shore up its balance sheet. 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. When we think about a company’s use of debt, we first look at cash and debt together.
What Is Beyond Air’s Net Debt?
The image below, which you can click on for greater detail, shows that at March 2021 Beyond Air had debt of US$5.03m, up from US$4.67m in one year. However, it does have US$34.6m in cash offsetting this, leading to net cash of US$29.6m.
How Strong Is Beyond Air’s Balance Sheet?
According to the last reported balance sheet, Beyond Air had liabilities of US$3.80m due within 12 months, and liabilities of US$6.26m due beyond 12 months. Offsetting these obligations, it had cash of US$34.6m as well as receivables valued at US$466.3k due within 12 months. So it can boast US$25.0m more liquid assets than total liabilities.
This surplus suggests that Beyond Air is using debt in a way that is appears to be both safe and conservative. Due to its strong net asset position, it is not likely to face issues with its lenders. Succinctly put, Beyond Air boasts net cash, so it’s fair to say it does not have a heavy debt load! 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 Beyond Air can strengthen its balance sheet over time.
Over 12 months, Beyond Air made a loss at the EBIT level, and saw its revenue drop to US$873k, which is a fall of 37%. To be frank that doesn’t bode well.
So How Risky Is Beyond Air?
We have no doubt that loss making companies are, in general, riskier than profitable ones. And in the last year Beyond Air had an earnings before interest and tax (EBIT) loss, truth be told. And over the same period it saw negative free cash outflow of US$21m and booked a US$23m accounting loss. But the saving grace is the US$29.6m on the balance sheet. That means it could keep spending at its current rate for more than two years. Even though its balance sheet seems sufficiently liquid, debt always makes us a little nervous if a company doesn’t produce free cash flow regularly. When analysing debt levels, the balance sheet is the obvious place to start.