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Legendary fund manager Li Lu (who Charlie Munger backed) once said, 'The biggest investment risk is not the volatility of prices, but whether you will suffer a 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. Importantly, United Therapeutics Corporation (NASDAQ:UTHR) does carry debt. But the more important question is: how much risk is that debt creating?
What Risk Does Debt Bring?
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. 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 examine debt levels, we first consider both cash and debt levels, together.
What Is United Therapeutics's Debt?
You can click the graphic below for the historical numbers, but it shows that United Therapeutics had US$795.2m of debt in September 2020, down from US$1.00b, one year before. However, its balance sheet shows it holds US$1.58b in cash, so it actually has US$785.3m net cash.
How Healthy Is United Therapeutics's Balance Sheet?
Zooming in on the latest balance sheet data, we can see that United Therapeutics had liabilities of US$258.9m due within 12 months and liabilities of US$869.2m due beyond that. On the other hand, it had cash of US$1.58b and US$152.3m worth of receivables due within a year. So it can boast US$604.7m more liquid assets than total liabilities.
This surplus suggests that United Therapeutics has a conservative balance sheet, and could probably eliminate its debt without much difficulty. Succinctly put, United Therapeutics boasts net cash, so it's fair to say it does not have a heavy debt load!
Although United Therapeutics made a loss at the EBIT level, last year, it was also good to see that it generated US$593m in EBIT over the last twelve months. When analysing debt levels, the balance sheet is the obvious place to start. But ultimately the future profitability of the business will decide if United Therapeutics 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.
Finally, while the tax-man may adore accounting profits, lenders only accept cold hard cash. While United Therapeutics 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. Over the last year, United Therapeutics actually produced more free cash flow than EBIT. That sort of strong cash generation warms our hearts like a puppy in a bumblebee suit.
While we empathize with investors who find debt concerning, you should keep in mind that United Therapeutics has net cash of US$785.3m, as well as more liquid assets than liabilities. And it impressed us with free cash flow of US$660m, being 111% of its EBIT. So we don't think United Therapeutics's use of debt is risky. 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. To that end, you should be aware of the 1 warning sign we've spotted with United Therapeutics .
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.
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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