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. 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. As with many other companies Alexion Pharmaceuticals, Inc. (NASDAQ:ALXN) makes use of debt. But the real question is whether this debt is making the company risky.
Why Does Debt Bring Risk?
Debt assists a business until the business has trouble paying it off, either with new capital or with free cash flow. Ultimately, if the company can't fulfill its legal obligations to repay debt, shareholders could walk away with nothing. 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. Having said that, the most common situation is where a company manages its debt reasonably well - and to its own advantage. When we examine debt levels, we first consider both cash and debt levels, together.
How Much Debt Does Alexion Pharmaceuticals Carry?
As you can see below, Alexion Pharmaceuticals had US$2.48b of debt at December 2019, down from US$2.86b a year prior. However, its balance sheet shows it holds US$2.75b in cash, so it actually has US$270.3m net cash.
How Strong Is Alexion Pharmaceuticals's Balance Sheet?
We can see from the most recent balance sheet that Alexion Pharmaceuticals had liabilities of US$1.19b falling due within a year, and liabilities of US$5.08b due beyond that. Offsetting this, it had US$2.75b in cash and US$1.24b in receivables that were due within 12 months. So its liabilities total US$2.28b more than the combination of its cash and short-term receivables.
Of course, Alexion Pharmaceuticals has a titanic market capitalization of US$22.0b, so these liabilities are probably manageable. But there are sufficient liabilities that we would certainly recommend shareholders continue to monitor the balance sheet, going forward. Despite its noteworthy liabilities, Alexion Pharmaceuticals boasts net cash, so it's fair to say it does not have a heavy debt load!
On top of that, Alexion Pharmaceuticals grew its EBIT by 32% 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, a company can only pay off debt with cold hard cash, not accounting profits. 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 51% of its EBIT, about what we'd expect. This cold hard cash means it can reduce its debt when it wants to.
While Alexion Pharmaceuticals does have more liabilities than liquid assets, it also has net cash of US$270.3m. And we liked the look of last year's 32% year-on-year EBIT growth. So is Alexion Pharmaceuticals's debt a risk? It doesn't seem so to us. 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 1 warning sign for Alexion Pharmaceuticals 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.
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