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 Emergent BioSolutions Inc. (NYSE:EBS) does have debt on its balance sheet. But should shareholders be worried about its use of debt?

Why Does Debt Bring Risk?

Debt assists a business until the business has trouble paying it off, either with new capital or with free cash flow. Part and parcel of capitalism is the process of 'creative destruction' where failed businesses are mercilessly liquidated by their bankers. 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. 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 thing to do when considering how much debt a business uses is to look at its cash and debt together.

See our latest analysis for Emergent BioSolutions

What Is Emergent BioSolutions's Net Debt?

As you can see below, Emergent BioSolutions had US$663.7m of debt at December 2024, down from US$860.2m a year prior. On the flip side, it has US$99.5m in cash leading to net debt of about US$564.2m.

A Look At Emergent BioSolutions' Liabilities

According to the last reported balance sheet, Emergent BioSolutions had liabilities of US$162.4m due within 12 months, and liabilities of US$744.5m due beyond 12 months. Offsetting these obligations, it had cash of US$99.5m as well as receivables valued at US$154.5m due within 12 months. So its liabilities outweigh the sum of its cash and (near-term) receivables by US$652.9m.

The deficiency here weighs heavily on the US$370.1m company itself, as if a child were struggling under the weight of an enormous back-pack full of books, his sports gear, and a trumpet. So we definitely think shareholders need to watch this one closely. At the end of the day, Emergent BioSolutions would probably need a major re-capitalization if its creditors were to demand repayment. 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 Emergent BioSolutions can strengthen its balance sheet over time. So if you want to see what the professionals think, you might find this free report on analyst profit forecasts to be interesting.

In the last year Emergent BioSolutions's revenue was pretty flat, and it made a negative EBIT. While that hardly impresses, its not too bad either.

Caveat Emptor

Over the last twelve months Emergent BioSolutions produced an earnings before interest and tax (EBIT) loss. Indeed, it lost a very considerable US$82m at the EBIT level. Considering that alongside the liabilities mentioned above make us nervous about the company. It would need to improve its operations quickly for us to be interested in it. It's fair to say the loss of US$191m didn't encourage us either; we'd like to see a profit. In the meantime, we consider the stock to be risky. For riskier companies like Emergent BioSolutions I always like to keep an eye on whether insiders are buying or selling. So click here if you want to find out for yourself.

If you're interested in investing in businesses that can grow profits without the burden of debt, then check out this free list of growing businesses that have net cash on the balance sheet.

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