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. It's only natural to consider a company's balance sheet when you examine how risky it is, since debt is often involved when a business collapses. Importantly, Neurocrine Biosciences, Inc. (NASDAQ:NBIX) does carry debt. But is this debt a concern to shareholders?
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. Ultimately, if the company can't fulfill its legal obligations to repay debt, shareholders could walk away with nothing. 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. When we examine debt levels, we first consider both cash and debt levels, together.
What Is Neurocrine Biosciences's Net Debt?
The image below, which you can click on for greater detail, shows that at June 2019 Neurocrine Biosciences had debt of US$398.5m, up from US$378.9m in one year. However, it does have US$620.0m in cash offsetting this, leading to net cash of US$221.5m.
How Strong Is Neurocrine Biosciences's Balance Sheet?
According to the last reported balance sheet, Neurocrine Biosciences had liabilities of US$100.6m due within 12 months, and liabilities of US$482.6m due beyond 12 months. Offsetting these obligations, it had cash of US$620.0m as well as receivables valued at US$95.4m due within 12 months. So it actually has US$132.2m more liquid assets than total liabilities.
Having regard to Neurocrine Biosciences's size, it seems that its liquid assets are well balanced with its total liabilities. So it's very unlikely that the US$9.49b company is short on cash, but still worth keeping an eye on the balance sheet. Succinctly put, Neurocrine Biosciences boasts net cash, so it's fair to say it does not have a heavy debt load!
Although Neurocrine Biosciences made a loss at the EBIT level, last year, it was also good to see that it generated US$135m in EBIT over the last twelve months. When analysing debt levels, the balance sheet is the obvious place to start. But it is future earnings, more than anything, that will determine Neurocrine Biosciences's ability to maintain a healthy balance sheet going forward. So if you want to see what the professionals think, you might find this free report on analyst profit forecasts to be interesting.
But our final consideration is also important, because a company cannot pay debt with paper profits; it needs cold hard cash. Neurocrine Biosciences may have net cash on the balance sheet, but it is still interesting to look at how well the business converts its earnings before interest and tax (EBIT) to free cash flow, because that will influence both its need for, and its capacity to manage debt. Looking at the most recent year, Neurocrine Biosciences recorded free cash flow of 33% of its EBIT, which is weaker than we'd expect. That's not great, when it comes to paying down debt.
While we empathize with investors who find debt concerning, you should keep in mind that Neurocrine Biosciences has net cash of US$221.5m, as well as more liquid assets than liabilities. So we don't have any problem with Neurocrine Biosciences's use of debt. Over time, share prices tend to follow earnings per share, so if you're interested in Neurocrine Biosciences, you may well want to click here to check an interactive graph of its earnings per share history.
When all is said and done, sometimes its easier to focus on companies that don't even need debt. Readers can access a list of growth stocks with zero net debt 100% free, right now.
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 firstname.lastname@example.org. 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.