Allergy Therapeutics (LON:AGY) Could Easily Take On More Debt – Simply Wall St News

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David Iben put it well when he said, ‘Volatility is not a risk we care about. What we care about is avoiding the 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 Allergy Therapeutics plc (LON:AGY) makes use of debt. But should shareholders be worried about its use of debt?

When Is Debt A Problem?

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. While that is not too common, we often do see indebted companies permanently diluting shareholders because lenders force them to raise capital at a distressed price. Of course, the upside of debt is that it often represents cheap capital, especially when it replaces dilution in a company with the ability to reinvest at high rates of return. The first step when considering a company’s debt levels is to consider its cash and debt together.

Check out our latest analysis for Allergy Therapeutics

What Is Allergy Therapeutics’s Debt?

You can click the graphic below for the historical numbers, but it shows that Allergy Therapeutics had UK£1.98m of debt in December 2019, down from UK£2.76m, one year before. However, it does have UK£39.7m in cash offsetting this, leading to net cash of UK£37.7m.

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AIM:AGY Historical Debt April 1st 2020

How Strong Is Allergy Therapeutics’s Balance Sheet?

We can see from the most recent balance sheet that Allergy Therapeutics had liabilities of UK£15.0m falling due within a year, and liabilities of UK£21.7m due beyond that. Offsetting this, it had UK£39.7m in cash and UK£8.77m in receivables that were due within 12 months. So it can boast UK£11.8m more liquid assets than total liabilities.

It’s good to see that Allergy Therapeutics has plenty of liquidity on its balance sheet, suggesting conservative management of liabilities. Given it has easily adequate short term liquidity, we don’t think it will have any issues with its lenders. Simply put, the fact that Allergy Therapeutics has more cash than debt is arguably a good indication that it can manage its debt safely.

Although Allergy Therapeutics made a loss at the EBIT level, last year, it was also good to see that it generated UK£6.6m in EBIT over the last twelve months. When analysing debt levels, the balance sheet is the obvious place to start. But it is future earnings, more than anything, that will determine Allergy Therapeutics’s ability to maintain a healthy balance sheet going forward. So if you’re focused on the future you can check out this free report showing analyst profit forecasts.

Finally, a company can only pay off debt with cold hard cash, not accounting profits. While Allergy Therapeutics has net cash on its balance sheet, it’s still worth taking a look at its ability to convert earnings before interest and tax (EBIT) to free cash flow, to help us understand how quickly it is building (or eroding) that cash balance. Over the last year, Allergy Therapeutics actually produced more free cash flow than EBIT. That sort of strong cash conversion gets us as excited as the crowd when the beat drops at a Daft Punk concert.

Summing up

While it is always sensible to investigate a company’s debt, in this case Allergy Therapeutics has UK£37.7m in net cash and a decent-looking balance sheet. And it impressed us with free cash flow of UK£9.7m, being 147% of its EBIT. So is Allergy Therapeutics’s debt a risk? It doesn’t seem so to us. When analysing debt levels, the balance sheet is the obvious place to start. However, not all investment risk resides within the balance sheet – far from it. To that end, you should learn about the 5 warning signs we’ve spotted with Allergy Therapeutics (including 1 which is doesn’t sit too well with us) .

Of course, if you’re the type of investor who prefers buying stocks without the burden of debt, then don’t hesitate to discover our exclusive list of net cash growth stocks, today.

If you spot an error that warrants correction, please contact the editor at editorial-team@simplywallst.com. 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. Simply Wall St has no position in the stocks mentioned.

We aim to bring you long-term focused research analysis driven by fundamental data. Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative material. Thank you for reading.

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