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Howard Marks put it nicely when he said that, rather than worrying about share price volatility, 'The possibility of permanent loss is the risk I worry about... and every practical investor I know worries about.' 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. Importantly, Neurocrine Biosciences, Inc. (NASDAQ:NBIX) does carry debt. But the more important question is: how much risk is that debt creating?
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 usual (but still expensive) situation is where a company must dilute shareholders at a cheap share price simply to get debt under control. 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.
How Much Debt Does Neurocrine Biosciences Carry?
You can click the graphic below for the historical numbers, but it shows that as of June 2020 Neurocrine Biosciences had US$419.5m of debt, an increase on US$398.5m, over one year. But it also has US$948.3m in cash to offset that, meaning it has US$528.8m net cash.
How Strong Is Neurocrine Biosciences's Balance Sheet?
We can see from the most recent balance sheet that Neurocrine Biosciences had liabilities of US$573.0m falling due within a year, and liabilities of US$111.4m due beyond that. On the other hand, it had cash of US$948.3m and US$148.4m worth of receivables due within a year. So it actually has US$412.3m more liquid assets than total liabilities.
This short term liquidity is a sign that Neurocrine Biosciences could probably pay off its debt with ease, as its balance sheet is far from stretched. Succinctly put, Neurocrine Biosciences boasts net cash, so it's fair to say it does not have a heavy debt load!
Better yet, Neurocrine Biosciences grew its EBIT by 168% last year, which is an impressive improvement. If maintained that growth will make the debt even more manageable in the years ahead. There's no doubt that we learn most about debt from the balance sheet. 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.
Finally, a business needs free cash flow to pay off debt; accounting profits just don't cut it. 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. During the last two years, Neurocrine Biosciences produced sturdy free cash flow equating to 80% of its EBIT, about what we'd expect. This cold hard cash means it can reduce its debt when it wants to.
While it is always sensible to investigate a company's debt, in this case Neurocrine Biosciences has US$528.8m in net cash and a decent-looking balance sheet. And it impressed us with its EBIT growth of 168% over the last year. So we don't think Neurocrine Biosciences's use of debt is risky. There's no doubt that we learn most about debt from the balance sheet. But ultimately, every company can contain risks that exist outside of the balance sheet. Consider risks, for instance. Every company has them, and we've spotted 3 warning signs for Neurocrine Biosciences you should know about.
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.
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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