These 4 Measures Indicate That Alexion Pharmaceuticals (NASDAQ:ALXN) Is Using Debt Safely
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. We note that Alexion Pharmaceuticals, Inc. (NASDAQ:ALXN) does have debt on its balance sheet. But the more important question is: how much risk is that debt creating?
Why Does Debt Bring Risk?
Debt and other liabilities become risky for a business when it cannot easily fulfill those obligations, either with free cash flow or by raising capital at an attractive price. 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 examine debt levels, we first consider both cash and debt levels, together.
Check out our latest analysis for Alexion Pharmaceuticals
How Much Debt Does Alexion Pharmaceuticals Carry?
As you can see below, Alexion Pharmaceuticals had US$2.65b of debt, at December 2020, which is about the same as the year before. You can click the chart for greater detail. However, its balance sheet shows it holds US$3.00b in cash, so it actually has US$346.1m net cash.
How Healthy Is Alexion Pharmaceuticals' Balance Sheet?
According to the last reported balance sheet, Alexion Pharmaceuticals had liabilities of US$1.62b due within 12 months, and liabilities of US$4.83b due beyond 12 months. Offsetting this, it had US$3.00b in cash and US$1.41b in receivables that were due within 12 months. So its liabilities total US$2.04b more than the combination of its cash and short-term receivables.
Since publicly traded Alexion Pharmaceuticals shares are worth a very impressive total of US$34.1b, it seems unlikely that this level of liabilities would be a major threat. But there are sufficient liabilities that we would certainly recommend shareholders continue to monitor the balance sheet, going forward. While it does have liabilities worth noting, Alexion Pharmaceuticals also has more cash than debt, so we're pretty confident it can manage its debt safely.
On top of that, Alexion Pharmaceuticals grew its EBIT by 34% over the last twelve months, and that growth will make it easier to handle its debt. The balance sheet is clearly the area to focus on when you are analysing debt. But it is future earnings, more than anything, that will determine Alexion Pharmaceuticals's ability to maintain a healthy balance sheet going forward. So if you want to see what the professionals think, you might find this free report on analyst profit forecasts to be interesting.
Finally, while the tax-man may adore accounting profits, lenders only accept cold hard cash. While Alexion Pharmaceuticals 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. During the last three years, Alexion Pharmaceuticals produced sturdy free cash flow equating to 76% of its EBIT, about what we'd expect. This free cash flow puts the company in a good position to pay down debt, when appropriate.
Summing up
We could understand if investors are concerned about Alexion Pharmaceuticals's liabilities, but we can be reassured by the fact it has has net cash of US$346.1m. And we liked the look of last year's 34% year-on-year EBIT growth. So is Alexion Pharmaceuticals's debt a risk? It doesn't seem so to us. There's no doubt that we learn most about debt from the balance sheet. However, not all investment risk resides within the balance sheet - far from it. To that end, you should be aware of the 2 warning signs we've spotted with Alexion Pharmaceuticals .
At the end of the day, it's often better to focus on companies that are free from net debt. You can access our special list of such companies (all with a track record of profit growth). It's free.
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. 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.
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