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Pacira BioSciences (NASDAQ:PCRX) Seems To Use Debt Rather Sparingly

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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 Pacira BioSciences, Inc. (NASDAQ:PCRX) makes use of debt. But the more important question is: how much risk is that debt creating?

When Is Debt A Problem?

Generally speaking, debt only becomes a real problem when a company can't easily pay it off, either by raising capital or with its own 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. Having said that, the most common situation is where a company manages its debt reasonably well - and to its own advantage. The first thing to do when considering how much debt a business uses is to look at its cash and debt together.

Check out our latest analysis for Pacira BioSciences

How Much Debt Does Pacira BioSciences Carry?

As you can see below, at the end of December 2020, Pacira BioSciences had US$462.7m of debt, up from US$306.0m a year ago. Click the image for more detail. However, it does have US$521.7m in cash offsetting this, leading to net cash of US$59.0m.


A Look At Pacira BioSciences' Liabilities

The latest balance sheet data shows that Pacira BioSciences had liabilities of US$253.3m due within a year, and liabilities of US$401.5m falling due after that. Offsetting these obligations, it had cash of US$521.7m as well as receivables valued at US$54.6m due within 12 months. So its liabilities total US$78.5m more than the combination of its cash and short-term receivables.

Of course, Pacira BioSciences has a market capitalization of US$3.13b, so these liabilities are probably manageable. However, we do think it is worth keeping an eye on its balance sheet strength, as it may change over time. Despite its noteworthy liabilities, Pacira BioSciences boasts net cash, so it's fair to say it does not have a heavy debt load!

It is well worth noting that Pacira BioSciences's EBIT shot up like bamboo after rain, gaining 44% in the last twelve months. That'll make it easier to manage its debt. When analysing debt levels, the balance sheet is the obvious place to start. But ultimately the future profitability of the business will decide if Pacira BioSciences 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.

But our final consideration is also important, because a company cannot pay debt with paper profits; it needs cold hard cash. While Pacira BioSciences has net cash on its balance sheet, it's still worth taking a look at its ability to convert earnings before interest and tax (EBIT) to free cash flow, to help us understand how quickly it is building (or eroding) that cash balance. Happily for any shareholders, Pacira BioSciences actually produced more free cash flow than EBIT over the last three years. There's nothing better than incoming cash when it comes to staying in your lenders' good graces.

Summing up

While it is always sensible to look at a company's total liabilities, it is very reassuring that Pacira BioSciences has US$59.0m in net cash. The cherry on top was that in converted 128% of that EBIT to free cash flow, bringing in US$39m. So is Pacira BioSciences's debt a risk? It doesn't seem so to us. 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 Pacira BioSciences (2 shouldn't be ignored) you should be aware of.

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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