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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 Supernus Pharmaceuticals, Inc. (NASDAQ:SUPN) does use debt in its business. But the real question is whether this debt is making the company risky.
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. While that is not too common, we often do see indebted companies permanently diluting shareholders because lenders force them to raise capital at a distressed price. Of course, debt can be an important tool in businesses, particularly capital heavy businesses. When we examine debt levels, we first consider both cash and debt levels, together.
What Is Supernus Pharmaceuticals's Net Debt?
The image below, which you can click on for greater detail, shows that at December 2019 Supernus Pharmaceuticals had debt of US$345.2m, up from US$329.5m in one year. But on the other hand it also has US$347.1m in cash, leading to a US$1.90m net cash position.
How Strong Is Supernus Pharmaceuticals's Balance Sheet?
We can see from the most recent balance sheet that Supernus Pharmaceuticals had liabilities of US$160.6m falling due within a year, and liabilities of US$404.3m due beyond that. Offsetting this, it had US$347.1m in cash and US$87.3m in receivables that were due within 12 months. So its liabilities outweigh the sum of its cash and (near-term) receivables by US$130.4m.
Given Supernus Pharmaceuticals has a market capitalization of US$1.02b, it's hard to believe these liabilities pose much threat. Having said that, it's clear that we should continue to monitor its balance sheet, lest it change for the worse. Despite its noteworthy liabilities, Supernus Pharmaceuticals boasts net cash, so it's fair to say it does not have a heavy debt load!
But the other side of the story is that Supernus Pharmaceuticals saw its EBIT decline by 6.2% over the last year. That sort of decline, if sustained, will obviously make debt harder to handle. When analysing debt levels, the balance sheet is the obvious place to start. But it is future earnings, more than anything, that will determine Supernus Pharmaceuticals's ability to maintain a healthy balance sheet going forward. So if you're focused on the future you can check out this free report showing analyst profit forecasts.
Finally, while the tax-man may adore accounting profits, lenders only accept cold hard cash. Supernus Pharmaceuticals 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 three years, Supernus Pharmaceuticals generated free cash flow amounting to a very robust 94% of its EBIT, more than we'd expect. That positions it well to pay down debt if desirable to do so.
While Supernus Pharmaceuticals does have more liabilities than liquid assets, it also has net cash of US$1.90m. The cherry on top was that in converted 94% of that EBIT to free cash flow, bringing in US$140m. So is Supernus Pharmaceuticals's debt a risk? It doesn't seem so to us. The balance sheet is clearly the area to focus on when you are analysing debt. But ultimately, every company can contain risks that exist outside of the balance sheet. Take risks, for example - Supernus Pharmaceuticals has 3 warning signs (and 1 which is potentially serious) we think you should know about.
Of course, if you're the type of investor who prefers buying stocks without the burden of debt, then don't hesitate to discover our exclusive list of net cash growth stocks, today.
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.
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