Small-cap and large-cap companies receive a lot of attention from investors, but mid-cap stocks like Neurocrine Biosciences, Inc. (NASDAQ:NBIX), with a market cap of US$7.7b, are often out of the spotlight. While they are less talked about as an investment category, mid-cap risk-adjusted returns have generally been better than more commonly focused stocks that fall into the small- or large-cap categories. NBIX’s financial liquidity and debt position will be analysed in this article, to get an idea of whether the company can fund opportunities for strategic growth and maintain strength through economic downturns. Remember this is a very top-level look that focuses exclusively on financial health, so I recommend a deeper analysis into NBIX here.
Does NBIX Produce Much Cash Relative To Its Debt?
Over the past year, NBIX has ramped up its debt from US$370m to US$388m , which includes long-term debt. With this rise in debt, NBIX's cash and short-term investments stands at US$651m to keep the business going. Additionally, NBIX has generated US$101m in operating cash flow during the same period of time, resulting in an operating cash to total debt ratio of 26%, meaning that NBIX’s current level of operating cash is high enough to cover debt.
Can NBIX pay its short-term liabilities?
Looking at NBIX’s US$88m in current liabilities, it seems that the business has been able to meet these obligations given the level of current assets of US$738m, with a current ratio of 8.36x. The current ratio is the number you get when you divide current assets by current liabilities. However, a ratio greater than 3x may be considered by some to be quite high, however this is not necessarily a negative for the company.
Can NBIX service its debt comfortably?
With debt reaching 81% of equity, NBIX may be thought of as relatively highly levered. 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 NBIX 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 NBIX's, case, the ratio of 3.28x suggests that interest is appropriately covered, which means that lenders may be less hesitant to lend out more funding as NBIX’s high interest coverage is seen as responsible and safe practice.
Although NBIX’s debt level is towards the higher end of the spectrum, its cash flow coverage seems adequate to meet obligations which means its debt is being efficiently utilised. Since there is also no concerns around NBIX'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 NBIX has been performing in the past. I recommend you continue to research Neurocrine Biosciences to get a better picture of the mid-cap 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.
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