Is Regeneron Pharmaceuticals (NASDAQ:REGN) A Risky Investment?
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, Regeneron Pharmaceuticals, Inc. (NASDAQ:REGN) does carry debt. But is this debt a concern to shareholders?
When Is Debt Dangerous?
Debt and other liabilities become risky for a business when it cannot easily fulfill those obligations, either with free cash flow or by raising capital at an attractive price. 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. Of course, the upside of debt is that it often represents cheap capital, especially when it replaces dilution in a company with the ability to reinvest at high rates of return. When we examine debt levels, we first consider both cash and debt levels, together.
Check out our latest analysis for Regeneron Pharmaceuticals
What Is Regeneron Pharmaceuticals's Net Debt?
As you can see below, Regeneron Pharmaceuticals had US$1.98b of debt, at December 2022, which is about the same as the year before. You can click the chart for greater detail. But on the other hand it also has US$7.74b in cash, leading to a US$5.76b net cash position.
A Look At Regeneron Pharmaceuticals' Liabilities
We can see from the most recent balance sheet that Regeneron Pharmaceuticals had liabilities of US$3.14b falling due within a year, and liabilities of US$3.41b due beyond that. Offsetting this, it had US$7.74b in cash and US$5.33b in receivables that were due within 12 months. So it actually has US$6.52b more liquid assets than total liabilities.
This surplus suggests that Regeneron Pharmaceuticals has a conservative balance sheet, and could probably eliminate its debt without much difficulty. Simply put, the fact that Regeneron Pharmaceuticals has more cash than debt is arguably a good indication that it can manage its debt safely.
The modesty of its debt load may become crucial for Regeneron Pharmaceuticals if management cannot prevent a repeat of the 44% cut to EBIT over the last year. When it comes to paying off debt, falling earnings are no more useful than sugary sodas are for your health. 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 Regeneron Pharmaceuticals'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. While Regeneron Pharmaceuticals 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. Over the most recent three years, Regeneron Pharmaceuticals recorded free cash flow worth 68% of its EBIT, which is around normal, given free cash flow excludes interest and tax. This free cash flow puts the company in a good position to pay down debt, when appropriate.
Summing Up
While we empathize with investors who find debt concerning, you should keep in mind that Regeneron Pharmaceuticals has net cash of US$5.76b, as well as more liquid assets than liabilities. And it impressed us with free cash flow of US$3.4b, being 68% of its EBIT. So we don't have any problem with Regeneron Pharmaceuticals's use of debt. Of course, we wouldn't say no to the extra confidence that we'd gain if we knew that Regeneron Pharmaceuticals insiders have been buying shares: if you're on the same wavelength, you can find out if insiders are buying by clicking this link.
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.
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This article by Simply Wall St is general in nature. We provide commentary based on historical data and analyst forecasts only using an unbiased methodology and our articles are not intended to be financial advice. 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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