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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. As with many other companies BeiGene, Ltd. (NASDAQ:BGNE) makes use of debt. But the real question is whether this debt is making the company risky.
What Risk Does Debt Bring?
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. 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. Of course, plenty of companies use debt to fund growth, without any negative consequences. The first thing to do when considering how much debt a business uses is to look at its cash and debt together.
How Much Debt Does BeiGene Carry?
The chart below, which you can click on for greater detail, shows that BeiGene had US$250.5m in debt in March 2020; about the same as the year before. However, it does have US$3.37b in cash offsetting this, leading to net cash of US$3.12b.
How Strong Is BeiGene's Balance Sheet?
The latest balance sheet data shows that BeiGene had liabilities of US$451.8m due within a year, and liabilities of US$788.4m falling due after that. Offsetting these obligations, it had cash of US$3.37b as well as receivables valued at US$78.0m due within 12 months. So it actually has US$2.21b more liquid assets than total liabilities.
This surplus suggests that BeiGene has a conservative balance sheet, and could probably eliminate its debt without much difficulty. Succinctly put, BeiGene boasts net cash, so it's fair to say it does not have a heavy debt load! When analysing debt levels, the balance sheet is the obvious place to start. But ultimately the future profitability of the business will decide if BeiGene 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 BeiGene wasn't profitable at an EBIT level, but managed to grow its revenue by 64%, to US$402m. Shareholders probably have their fingers crossed that it can grow its way to profits.
So How Risky Is BeiGene?
By their very nature companies that are losing money are more risky than those with a long history of profitability. And we do note that BeiGene had negative earnings before interest and tax (EBIT), over the last year. And over the same period it saw negative free cash outflow of US$1.1b and booked a US$1.1b accounting loss. But the saving grace is the US$3.12b on the balance sheet. That means it could keep spending at its current rate for more than two years. With very solid revenue growth in the last year, BeiGene may be on a path to profitability. Pre-profit companies are often risky, but they can also offer great rewards. When analysing debt levels, the balance sheet is the obvious place to start. However, not all investment risk resides within the balance sheet - far from it. For instance, we've identified 4 warning signs for BeiGene that you should be aware of.
If you're interested in investing in businesses that can grow profits without the burden of debt, then check out this free list of growing businesses that have net cash on the balance sheet.
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. We aim to bring you long-term focused analysis driven by fundamental data. Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative material. Simply Wall St has no position in any stocks mentioned.
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