Some say volatility, rather than debt, is the best way to think about risk as an investor, but Warren Buffett famously said that 'Volatility is far from synonymous with risk.' 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. We can see that Regeneron Pharmaceuticals, Inc. (NASDAQ:REGN) does use debt in its business. But is this debt a concern to shareholders?
When Is Debt A Problem?
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. If things get really bad, the lenders can take control of the business. However, a more common (but still painful) scenario is that it has to raise new equity capital at a low price, thus permanently diluting shareholders. 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 think about a company's use of debt, we first look at cash and debt together.
What Is Regeneron Pharmaceuticals's Debt?
As you can see below, Regeneron Pharmaceuticals had US$709.9m of debt, at March 2019, which is about the same the year before. You can click the chart for greater detail. But on the other hand it also has US$3.23b in cash, leading to a US$2.52b net cash position.
How Strong Is Regeneron Pharmaceuticals's Balance Sheet?
The latest balance sheet data shows that Regeneron Pharmaceuticals had liabilities of US$1.51b due within a year, and liabilities of US$1.90b falling due after that. Offsetting this, it had US$3.23b in cash and US$2.34b in receivables that were due within 12 months. So it actually has US$2.16b 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. Succinctly put, Regeneron Pharmaceuticals boasts net cash, so it's fair to say it does not have a heavy debt load!
And we also note warmly that Regeneron Pharmaceuticals grew its EBIT by 10% last year, making its debt load easier to handle. The balance sheet is clearly the area to focus on when you are analysing debt. 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.
Finally, while the tax-man may adore accounting profits, lenders only accept 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 77% of its EBIT, which is around normal, given free cash flow excludes interest and tax. 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 Regeneron Pharmaceuticals has US$2.5b in net cash and a decent-looking balance sheet. And it impressed us with free cash flow of US$2.1b, being 77% of its EBIT. So is Regeneron Pharmaceuticals's debt a risk? It doesn't seem so to us. Above most other metrics, we think its important to track how fast earnings per share is growing, if at all. If you've also come to that realization, you're in luck, because today you can view this interactive graph of Regeneron Pharmaceuticals's earnings per share history for free.
If you're interested in investing in businesses that can grow profits without the burden of debt, then check out this free list of growing businesses that have net cash on the balance sheet.
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 email@example.com. 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.