Does Neurocrine Biosciences Inc’s (NASDAQ:NBIX) Debt Level Pose A Problem?
The size of Neurocrine Biosciences Inc (NASDAQ:NBIX), a US$10.0b large-cap, often attracts investors seeking a reliable investment in the stock market. Market participants who are conscious of risk tend to search for large firms, attracted by the prospect of varied revenue sources and strong returns on capital. But, its financial health remains the key to continued success. Let’s take a look at Neurocrine Biosciences’s leverage and assess its financial strength to get an idea of their ability to fund strategic acquisitions and grow through cyclical pressures. Note that this commentary is very high-level and solely focused on financial health, so I suggest you dig deeper yourself into NBIX here.
Check out our latest analysis for Neurocrine Biosciences
How does NBIX’s operating cash flow stack up against its debt?
NBIX has built up its total debt levels in the last twelve months, from US$365m to US$384m , which comprises of short- and long-term debt. With this increase in debt, NBIX’s cash and short-term investments stands at US$635m , ready to deploy into the business. Additionally, NBIX has generated US$91m in operating cash flow in the last twelve months, leading to an operating cash to total debt ratio of 24%, signalling that NBIX’s current level of operating cash is high enough to cover debt. This ratio can also be interpreted as a measure of efficiency as an alternative to return on assets. In NBIX’s case, it is able to generate 0.24x cash from its debt capital.
Can NBIX pay its short-term liabilities?
At the current liabilities level of US$456m liabilities, the company has maintained a safe level of current assets to meet its obligations, with the current ratio last standing at 1.57x. Generally, for Biotechs companies, this is a reasonable ratio since there is a bit of a cash buffer without leaving too much capital in a low-return environment.
Does NBIX face the risk of succumbing to its debt-load?
With debt reaching 86% of equity, NBIX may be thought of as relatively highly levered. This isn’t surprising for large-caps, as equity can often be more expensive to issue than debt, plus interest payments are tax deductible. Since large-caps are seen as safer than their smaller constituents, they tend to enjoy lower cost of capital. No matter how high the company’s debt, if it can easily cover the interest payments, it’s considered to be efficient with its use of excess leverage. A company generating earnings before interest and tax (EBIT) at least three times its net interest payments is considered financially sound. For NBIX, the ratio of 1.41x suggests that interest is not strongly covered. Although it is highly unlikely we’d see Neurocrine Biosciences defaulting or announcing bankruptcy tomorrow, this situation may put the company in a tough position when borrowing more money in the future to fuel its growth.
Next Steps:
At its current level of cash flow coverage, NBIX has room for improvement to better cushion for events which may require debt repayment. However, the company exhibits proper management of current assets and upcoming liabilities. I admit this is a fairly basic analysis for NBIX’s financial health. Other important fundamentals need to be considered alongside. I suggest you continue to research Neurocrine Biosciences to get a better picture of the stock by looking at:
Future Outlook: What are well-informed industry analysts predicting for NBIX’s future growth? Take a look at our free research report of analyst consensus for NBIX’s outlook.
Valuation: What is NBIX 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 NBIX 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.
To help readers see past the short term volatility of the financial market, we aim to bring you a long-term focused research analysis purely driven by fundamental data. Note that our analysis does not factor in the latest price-sensitive company announcements.
The author is an independent contributor and at the time of publication had no position in the stocks mentioned. For errors that warrant correction please contact the editor at editorial-team@simplywallst.com.
