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. 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. We can see that BioMarin Pharmaceutical Inc. (NASDAQ:BMRN) does use debt in its business. But the more important question is: how much risk is that debt creating?
When Is Debt A Problem?
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. Ultimately, if the company can't fulfill its legal obligations to repay debt, shareholders could walk away with nothing. 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. 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.
How Much Debt Does BioMarin Pharmaceutical Carry?
As you can see below, BioMarin Pharmaceutical had US$839.2m of debt at June 2019, down from US$1.19b a year prior. However, because it has a cash reserve of US$731.1m, its net debt is less, at about US$108.1m.
How Healthy Is BioMarin Pharmaceutical's Balance Sheet?
We can see from the most recent balance sheet that BioMarin Pharmaceutical had liabilities of US$439.4m falling due within a year, and liabilities of US$993.0m due beyond that. Offsetting these obligations, it had cash of US$731.1m as well as receivables valued at US$377.2m due within 12 months. So its liabilities total US$324.2m more than the combination of its cash and short-term receivables.
Since publicly traded BioMarin Pharmaceutical shares are worth a very impressive total of US$12.4b, it seems unlikely that this level of liabilities would be a major threat. Having said that, it's clear that we should continue to monitor its balance sheet, lest it change for the worse. Carrying virtually no net debt, BioMarin Pharmaceutical has a very light debt load indeed. The balance sheet is clearly the area to focus on when you are analysing debt. But ultimately the future profitability of the business will decide if BioMarin Pharmaceutical can strengthen its balance sheet over time. So if you want to see what the professionals think, you might find this free report on analyst profit forecasts to be interesting.
In the last year BioMarin Pharmaceutical wasn't profitable at an EBIT level, but managed to grow its revenue by6.6%, to US$1.5b. That rate of growth is a bit slow for our taste, but it takes all types to make a world.
Over the last twelve months BioMarin Pharmaceutical produced an earnings before interest and tax (EBIT) loss. Indeed, it lost US$165m at the EBIT level. When we look at that and recall the liabilities on its balance sheet, relative to cash, it seems unwise to us for the company to have any debt. Quite frankly we think the balance sheet is far from match-fit, although it could be improved with time. Another cause for caution is that is bled US$112m in negative free cash flow over the last twelve months. So suffice it to say we do consider the stock to be risky. For riskier companies like BioMarin Pharmaceutical I always like to keep an eye on the long term profit and revenue trends. Fortunately, you can click to see our interactive graph of its profit, revenue, and operating cashflow.
When all is said and done, sometimes its easier to focus on companies that don't even need debt. Readers can access a list of growth stocks with zero net debt 100% free, right now.
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