Warren Buffett famously said, 'Volatility is far from synonymous with risk.' 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 Halozyme Therapeutics, Inc. (NASDAQ:HALO) does use debt in its business. But should shareholders be worried about its use of debt?
What Risk Does Debt Bring?
Debt assists a business until the business has trouble paying it off, either with new capital or with free cash flow. In the worst case scenario, a company can go bankrupt if it cannot pay its creditors. 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. The first step when considering a company's debt levels is to consider its cash and debt together.
What Is Halozyme Therapeutics's Debt?
You can click the graphic below for the historical numbers, but it shows that Halozyme Therapeutics had US$105.4m of debt in March 2019, down from US$185.2m, one year before. However, it does have US$328.7m in cash offsetting this, leading to net cash of US$223.3m.
How Healthy Is Halozyme Therapeutics's Balance Sheet?
We can see from the most recent balance sheet that Halozyme Therapeutics had liabilities of US$138.7m falling due within a year, and liabilities of US$30.4m due beyond that. Offsetting this, it had US$328.7m in cash and US$28.2m in receivables that were due within 12 months. So it can boast US$187.8m more liquid assets than total liabilities.
This surplus suggests that Halozyme Therapeutics has a conservative balance sheet, and could probably eliminate its debt without much difficulty. Simply put, the fact that Halozyme Therapeutics has more cash than debt is arguably a good indication that it can manage its debt safely. 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 Halozyme Therapeutics's ability to maintain a healthy balance sheet going forward. So if you're focused on the future you can check out this free report showing analyst profit forecasts.
Over 12 months, Halozyme Therapeutics saw its revenue drop to US$178m, which is a fall of 44%. To be frank that doesn't bode well.
So How Risky Is Halozyme Therapeutics?
By their very nature companies that are losing money are more risky than those with a long history of profitability. And in the last year Halozyme Therapeutics had negative earnings before interest and tax (EBIT), truth be told. Indeed, in that time it burnt through US$36m of cash and made a loss of US$51m. But the saving grace is the US$329m on the balance sheet. That kitty means the company can keep spending for growth for at least five years, at current rates. Even though its balance sheet seems sufficiently liquid, debt always makes us a little nervous if a company doesn't produce free cash flow regularly. For riskier companies like Halozyme Therapeutics I always like to keep an eye on whether insiders are buying or selling. So click here if you want to find out for yourself.
If, after all that, you're more interested in a fast growing company with a rock-solid balance sheet, then check out our list of net cash growth stocks without delay.
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 email@example.com. 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.