David Iben put it well when he said, ‘Volatility is not a risk we care about. What we care about is avoiding the 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. Importantly, Ligand Pharmaceuticals Incorporated (NASDAQ:LGND) does carry debt. But is this debt a concern to shareholders?
What Risk Does Debt Bring?
Debt is a tool to help businesses grow, but if a business is incapable of paying off its lenders, then it exists at their mercy. Part and parcel of capitalism is the process of ‘creative destruction’ where failed businesses are mercilessly liquidated by their bankers. 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, plenty of companies use debt to fund growth, without any negative consequences. The first thing to do when considering how much debt a business uses is to look at its cash and debt together.
See our latest analysis for Ligand Pharmaceuticals
How Much Debt Does Ligand Pharmaceuticals Carry?
You can click the graphic below for the historical numbers, but it shows that Ligand Pharmaceuticals had US$444.4m of debt in March 2020, down from US$643.7m, one year before. However, its balance sheet shows it holds US$771.7m in cash, so it actually has US$327.3m net cash.
How Strong Is Ligand Pharmaceuticals’s Balance Sheet?
We can see from the most recent balance sheet that Ligand Pharmaceuticals had liabilities of US$20.4m falling due within a year, and liabilities of US$503.6m due beyond that. On the other hand, it had cash of US$771.7m and US$46.8m worth of receivables due within a year. So it actually has US$294.4m more liquid assets than total liabilities.
This excess liquidity suggests that Ligand Pharmaceuticals is taking a careful approach to debt. Given it has easily adequate short term liquidity, we don’t think it will have any issues with its lenders. Simply put, the fact that Ligand Pharmaceuticals has more cash than debt is arguably a good indication that it can manage its debt safely. 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 Ligand 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.
Over 12 months, Ligand Pharmaceuticals made a loss at the EBIT level, and saw its revenue drop to US$110m, which is a fall of 54%. That makes us nervous, to say the least.
So How Risky Is Ligand Pharmaceuticals?
We have no doubt that loss making companies are, in general, riskier than profitable ones. And we do note that Ligand Pharmaceuticals had negative earnings before interest and tax (EBIT), over the last year. And over the same period it saw negative free cash outflow of US$60.2m and booked a US$61.2m accounting loss. Given it only has net cash of US$327.3m, the company may need to raise more capital if it doesn’t reach break-even soon. Overall, its balance sheet doesn’t seem overly risky, at the moment, but we’re always cautious until we see the positive free cash flow. 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. Consider for instance, the ever-present spectre of investment risk. We’ve identified 3 warning signs with Ligand Pharmaceuticals (at least 1 which is potentially serious) , and understanding them should be part of your investment process.
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.
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