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Small and large cap stocks are widely popular for a variety of reasons, however, mid-cap companies such as Ligand Pharmaceuticals Incorporated (NASDAQ:LGND), with a market cap of US$2.2b, often get neglected by retail investors. However, generally ignored mid-caps have historically delivered better risk-adjusted returns than the two other categories of stocks. This article will examine LGND’s financial liquidity and debt levels to get an idea of whether the company can deal with cyclical downturns and maintain funds to accommodate strategic spending for future growth. Note that this information is centred entirely on financial health and is a top-level understanding, so I encourage you to look further into LGND here.
Does LGND Produce Much Cash Relative To Its Debt?
LGND's debt levels surged from US$228m to US$649m over the last 12 months – this includes long-term debt. With this increase in debt, LGND currently has US$1.5b remaining in cash and short-term investments to keep the business going. Moreover, LGND has produced cash from operations of US$179m during the same period of time, leading to an operating cash to total debt ratio of 28%, meaning that LGND’s debt is appropriately covered by operating cash.
Can LGND meet its short-term obligations with the cash in hand?
With current liabilities at US$187m, it appears that the company has been able to meet these commitments with a current assets level of US$1.6b, leading to a 8.39x current account ratio. The current ratio is the number you get when you divide current assets by current liabilities. However, a ratio above 3x may be considered excessive by some investors, yet this is not usually a major negative for a company.
Does LGND face the risk of succumbing to its debt-load?
LGND is a relatively highly levered company with a debt-to-equity of 60%. This is not unusual for mid-caps as debt tends to be a cheaper and faster source of funding for some businesses. We can check to see whether LGND is able to meet its debt obligations by looking at the net interest coverage ratio. A company generating earnings before interest and tax (EBIT) at least three times its net interest payments is considered financially sound. In LGND's, case, the ratio of 4.05x suggests that interest is appropriately covered, which means that lenders may be inclined to lend more money to the company, as it is seen as safe in terms of payback.
LGND’s high cash coverage means that, although its debt levels are high, the company is able to utilise its borrowings efficiently in order to generate cash flow. Since there is also no concerns around LGND's liquidity needs, this may be its optimal capital structure for the time being. Keep in mind I haven't considered other factors such as how LGND has been performing in the past. You should continue to research Ligand Pharmaceuticals to get a better picture of the mid-cap by looking at:
- Future Outlook: What are well-informed industry analysts predicting for LGND’s future growth? Take a look at our free research report of analyst consensus for LGND’s outlook.
- Valuation: What is LGND worth today? Is the stock undervalued, even when its growth outlook is factored into its intrinsic value? The intrinsic value infographic in our free research report helps visualize whether LGND is currently mispriced by the market.
- Other High-Performing Stocks: Are there other stocks that provide better prospects with proven track records? Explore our free list of these great stocks here.
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 firstname.lastname@example.org. 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.