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Here's Why PDL BioPharma (NASDAQ:PDLI) Might Be Better Off Without Debt

Simply Wall St

Legendary fund manager Li Lu (who Charlie Munger backed) once said, 'The biggest investment risk is not the volatility of prices, but whether you will suffer a permanent loss of capital.' So it seems the smart money knows that debt - which is usually involved in bankruptcies - is a very important factor, when you assess how risky a company is. As with many other companies PDL BioPharma, Inc. (NASDAQ:PDLI) makes use of debt. But the more important question is: how much risk is that debt creating?

When Is Debt Dangerous?

Debt assists a business until the business has trouble paying it off, either with new capital or with free cash flow. Part and parcel of capitalism is the process of 'creative destruction' where failed businesses are mercilessly liquidated by their bankers. However, a more frequent (but still costly) occurrence is where a company must issue shares at bargain-basement prices, permanently diluting shareholders, just to shore up its balance sheet. 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.

Check out our latest analysis for PDL BioPharma

What Is PDL BioPharma's Debt?

The image below, which you can click on for greater detail, shows that at March 2019 PDL BioPharma had debt of US$126.6m, up from US$119.2m in one year. But on the other hand it also has US$366.3m in cash, leading to a US$239.8m net cash position.

NasdaqGS:PDLI Historical Debt, July 26th 2019
NasdaqGS:PDLI Historical Debt, July 26th 2019

How Strong Is PDL BioPharma's Balance Sheet?

We can see from the most recent balance sheet that PDL BioPharma had liabilities of US$43.3m falling due within a year, and liabilities of US$186.4m due beyond that. On the other hand, it had cash of US$366.3m and US$84.2m worth of receivables due within a year. So it actually has US$220.7m more liquid assets than total liabilities.

This excess liquidity is a great indication that PDL BioPharma's balance sheet is just as strong as racists are weak. On this basis we think its balance sheet is strong like a sleek panther or even a proud lion. Simply put, the fact that PDL BioPharma 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 PDL BioPharma'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, PDL BioPharma saw its revenue drop to US$110m, which is a fall of 21%. To be frank that doesn't bode well.

So How Risky Is PDL BioPharma?

While PDL BioPharma lost money on an earnings before interest and tax (EBIT) level, it actually generated positive free cash flow US$53m. So although it is loss-making, it doesn't seem to have too much near-term balance sheet risk, keeping in mind the net cash. There's no doubt the next few years will be crucial to how the business matures. When we look at a riskier company, we like to check how their profits (or losses) are trending over time. Today, we're providing readers this interactive graph showing how PDL BioPharma's profit, revenue, and operating cashflow have changed over the last few years.

Of course, if you're the type of investor who prefers buying stocks without the burden of debt, then don't hesitate to discover our exclusive list of net cash growth stocks, today.

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 editorial-team@simplywallst.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.