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These 4 Measures Indicate That Repligen (NASDAQ:RGEN) Is Using Debt Reasonably Well

Simply Wall St
·4 mins read

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.' So it seems the smart money knows that debt - which is usually involved in bankruptcies - is a very important factor, when you assess how risky a company is. Importantly, Repligen Corporation (NASDAQ:RGEN) does carry debt. But should shareholders be worried about its use of debt?

Why Does Debt Bring Risk?

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. Ultimately, if the company can't fulfill its legal obligations to repay debt, shareholders could walk away with nothing. However, a more usual (but still expensive) situation is where a company must dilute shareholders at a cheap share price simply to get debt under control. 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.

View our latest analysis for Repligen

How Much Debt Does Repligen Carry?

You can click the graphic below for the historical numbers, but it shows that as of June 2020 Repligen had US$238.2m of debt, an increase on US$105.7m, over one year. However, its balance sheet shows it holds US$560.4m in cash, so it actually has US$322.2m net cash.

debt-equity-history-analysis
debt-equity-history-analysis

A Look At Repligen's Liabilities

Zooming in on the latest balance sheet data, we can see that Repligen had liabilities of US$44.4m due within 12 months and liabilities of US$297.6m due beyond that. Offsetting this, it had US$560.4m in cash and US$49.3m in receivables that were due within 12 months. So it can boast US$267.6m more liquid assets than total liabilities.

This short term liquidity is a sign that Repligen could probably pay off its debt with ease, as its balance sheet is far from stretched. Simply put, the fact that Repligen has more cash than debt is arguably a good indication that it can manage its debt safely.

While Repligen doesn't seem to have gained much on the EBIT line, at least earnings remain stable for now. When analysing debt levels, the balance sheet is the obvious place to start. But it is future earnings, more than anything, that will determine Repligen'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, a company can only pay off debt with cold hard cash, not accounting profits. While Repligen 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, Repligen generated free cash flow amounting to a very robust 83% of its EBIT, more than we'd expect. That positions it well to pay down debt if desirable to do so.

Summing up

While we empathize with investors who find debt concerning, you should keep in mind that Repligen has net cash of US$322.2m, as well as more liquid assets than liabilities. The cherry on top was that in converted 83% of that EBIT to free cash flow, bringing in US$42m. So we don't think Repligen's use of debt is risky. The balance sheet is clearly the area to focus on when you are analysing debt. But ultimately, every company can contain risks that exist outside of the balance sheet. Consider risks, for instance. Every company has them, and we've spotted 2 warning signs for Repligen you should know about.

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.

Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team@simplywallst.com.