Warren Buffett famously said, ‘Volatility is far from synonymous with risk.’ 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 can see that Puma Biotechnology, Inc. (NASDAQ:PBYI) does use debt in its business. But the more important question is: how much risk is that debt creating?

When Is Debt Dangerous?

Debt assists a business until the business has trouble paying it off, either with new capital or with free cash flow. Ultimately, if the company can’t fulfill its legal obligations to repay debt, shareholders could walk away with nothing. 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. Having said that, the most common situation is where a company manages its debt reasonably well – and to its own advantage. The first step when considering a company’s debt levels is to consider its cash and debt together.

What Is Puma Biotechnology’s Debt?

The chart below, which you can click on for greater detail, shows that Puma Biotechnology had US$97.4m in debt in March 2022; about the same as the year before. However, because it has a cash reserve of US$73.9m, its net debt is less, at about US$23.5m.

A Look At Puma Biotechnology’s Liabilities

Zooming in on the latest balance sheet data, we can see that Puma Biotechnology had liabilities of US$74.8m due within 12 months and liabilities of US$118.8m due beyond that. On the other hand, it had cash of US$73.9m and US$27.0m worth of receivables due within a year. So it has liabilities totalling US$92.6m more than its cash and near-term receivables, combined.

This deficit is considerable relative to its market capitalization of US$105.2m, so it does suggest shareholders should keep an eye on Puma Biotechnology’s use of debt. This suggests shareholders would be heavily diluted if the company needed to shore up its balance sheet in a hurry. There’s no doubt that we learn most about debt from the balance sheet. But ultimately the future profitability of the business will decide if Puma Biotechnology can strengthen its balance sheet over time.

Over 12 months, Puma Biotechnology made a loss at the EBIT level, and saw its revenue drop to US$201m, which is a fall of 26%. That makes us nervous, to say the least.

Caveat Emptor

While Puma Biotechnology’s falling revenue is about as heartwarming as a wet blanket, arguably its earnings before interest and tax (EBIT) loss is even less appealing. Indeed, it lost a very considerable US$20m at the EBIT level. When we look at that and recall the liabilities on its balance sheet, relative to cash, it seems unwise to us for the company to have any debt. Quite frankly we think the balance sheet is far from match-fit, although it could be improved with time. Another cause for caution is that is bled US$22m in negative free cash flow over the last twelve months. So suffice it to say we consider the stock very risky.