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These 4 Measures Indicate That Supernus Pharmaceuticals (NASDAQ:SUPN) Is Using Debt Safely

Simply Wall St

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.' 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. We note that Supernus Pharmaceuticals, Inc. (NASDAQ:SUPN) does have debt on its balance sheet. But the real question is whether this debt is making the company risky.

When Is Debt Dangerous?

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. If things get really bad, the lenders can take control of the business. However, a more common (but still painful) scenario is that it has to raise new equity capital at a low price, thus permanently diluting shareholders. Of course, debt can be an important tool in businesses, particularly capital heavy businesses. When we think about a company's use of debt, we first look at cash and debt together.

Check out our latest analysis for Supernus Pharmaceuticals

What Is Supernus Pharmaceuticals's Net Debt?

The image below, which you can click on for greater detail, shows that at June 2019 Supernus Pharmaceuticals had debt of US$337.2m, up from US$321.9m in one year. However, it also had US$258.6m in cash, and so its net debt is US$78.6m.

NasdaqGM:SUPN Historical Debt, August 14th 2019

A Look At Supernus Pharmaceuticals's Liabilities

According to the last reported balance sheet, Supernus Pharmaceuticals had liabilities of US$144.0m due within 12 months, and liabilities of US$396.8m due beyond 12 months. On the other hand, it had cash of US$258.6m and US$94.3m worth of receivables due within a year. So it has liabilities totalling US$187.9m more than its cash and near-term receivables, combined.

Given Supernus Pharmaceuticals has a market capitalization of US$1.51b, it's hard to believe these liabilities pose much threat. However, we do think it is worth keeping an eye on its balance sheet strength, as it may change over time.

We use two main ratios to inform us about debt levels relative to earnings. The first is net debt divided by earnings before interest, tax, depreciation, and amortization (EBITDA), while the second is how many times its earnings before interest and tax (EBIT) covers its interest expense (or its interest cover, for short). Thus we consider debt relative to earnings both with and without depreciation and amortization expenses.

Supernus Pharmaceuticals's net debt is only 0.52 times its EBITDA. And its EBIT easily covers its interest expense, being 45.0 times the size. So we're pretty relaxed about its super-conservative use of debt. Also good is that Supernus Pharmaceuticals grew its EBIT at 17% over the last year, further increasing its ability to manage debt. When analysing debt levels, the balance sheet is the obvious place to start. But it is future earnings, more than anything, that will determine Supernus Pharmaceuticals'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. So we clearly need to look at whether that EBIT is leading to corresponding free cash flow. Over the last three years, Supernus Pharmaceuticals actually produced more free cash flow than EBIT. There's nothing better than incoming cash when it comes to staying in your lenders' good graces.

Our View

The good news is that Supernus Pharmaceuticals's demonstrated ability to cover its interest expense with its EBIT delights us like a fluffy puppy does a toddler. And the good news does not stop there, as its conversion of EBIT to free cash flow also supports that impression! Looking at the bigger picture, we think Supernus Pharmaceuticals's use of debt seems quite reasonable and we're not concerned about it. After all, sensible leverage can boost returns on equity. Above most other metrics, we think its important to track how fast earnings per share is growing, if at all. If you've also come to that realization, you're in luck, because today you can view this interactive graph of Supernus Pharmaceuticals's earnings per share history for free.

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.

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.

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. Thank you for reading.