Is Inotiv (NASDAQ:NOTV) A Risky Investment?
The external fund manager backed by Berkshire Hathaway’s Charlie Munger, Li Lu, makes no bones about it when he says ‘The biggest investment risk is not the volatility of prices, but whether you will suffer a permanent loss of capital.’ When we think about how risky a company is, we always like to look at its use of debt, since debt overload can lead to ruin. We note that Inotiv, Inc. (NASDAQ:NOTV) does have debt on its balance sheet. But the more important question is: how much risk is that debt creating?
What Risk Does Debt Bring?
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. Part and parcel of capitalism is the process of ‘creative destruction’ where failed businesses are mercilessly liquidated by their bankers. 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, plenty of companies use debt to fund growth, without any negative consequences. The first thing to do when considering how much debt a business uses is to look at its cash and debt together.
What Is Inotiv’s Debt?
You can click the graphic below for the historical numbers, but it shows that as of June 2023 Inotiv had US$375.6m of debt, an increase on US$338.8m, over one year. On the flip side, it has US$22.2m in cash leading to net debt of about US$353.3m.
A Look At Inotiv’s Liabilities
Zooming in on the latest balance sheet data, we can see that Inotiv had liabilities of US$121.2m due within 12 months and liabilities of US$458.3m due beyond that. On the other hand, it had cash of US$22.2m and US$84.7m worth of receivables due within a year. So its liabilities outweigh the sum of its cash and (near-term) receivables by US$472.6m.
This deficit casts a shadow over the US$106.2m company, like a colossus towering over mere mortals. So we definitely think shareholders need to watch this one closely. After all, Inotiv would likely require a major re-capitalisation if it had to pay its creditors today. 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 Inotiv can strengthen its balance sheet over time. So if you’re focused on the future you can check out this free report showing analyst profit forecasts.
In the last year Inotiv wasn’t profitable at an EBIT level, but managed to grow its revenue by 36%, to US$582m. Shareholders probably have their fingers crossed that it can grow its way to profits.
While we can certainly appreciate Inotiv’s revenue growth, its earnings before interest and tax (EBIT) loss is not ideal. Its EBIT loss was a whopping US$14m. If you consider the significant liabilities mentioned above, we are extremely wary of this investment. Of course, it may be able to improve its situation with a bit of luck and good execution. Nevertheless, we would not bet on it given that it vaporized US$17m in cash over the last twelve months, and it doesn’t have much by way of liquid assets. So we consider this a high risk stock and we wouldn’t be at all surprised if the company asks shareholders for money before long. 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. We’ve identified 2 warning signs with Inotiv (at least 1 which doesn’t sit too well with us) , and understanding them should be part of your investment process.
If, after all that, you’re more interested in a fast growing company with a rock-solid balance sheet, then check out our list of net cash growth stocks without delay.
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Find out whether Inotiv is potentially over or undervalued by checking out our comprehensive analysis, which includes fair value estimates, risks and warnings, dividends, insider transactions and financial health.
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This article by Simply Wall St is general in nature. We provide commentary based on historical data and analyst forecasts only using an unbiased methodology and our articles are not intended to be financial advice. 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.