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.’ So it might be obvious that you need to consider debt, when you think about how risky any given stock is, because too much debt can sink a company. As with many other companies BioMarin Pharmaceutical Inc. (NASDAQ:BMRN) makes use of debt. But is this debt a concern to shareholders?
When Is Debt Dangerous?
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. Ultimately, if the company can’t fulfill its legal obligations to repay debt, shareholders could walk away with nothing. 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. By replacing dilution, though, debt can be an extremely good tool for businesses that need capital to invest in growth at high rates of return. When we think about a company’s use of debt, we first look at cash and debt together.
See our latest analysis for BioMarin Pharmaceutical
How Much Debt Does BioMarin Pharmaceutical Carry?
You can click the graphic below for the historical numbers, but it shows that as of June 2020 BioMarin Pharmaceutical had US$1.44b of debt, an increase on US$839.2m, over one year. However, it also had US$1.38b in cash, and so its net debt is US$62.9m.
How Strong Is BioMarin Pharmaceutical’s Balance Sheet?
According to the last reported balance sheet, BioMarin Pharmaceutical had liabilities of US$813.3m due within 12 months, and liabilities of US$1.25b due beyond 12 months. On the other hand, it had cash of US$1.38b and US$381.2m worth of receivables due within a year. So it has liabilities totalling US$303.8m more than its cash and near-term receivables, combined.
Given BioMarin Pharmaceutical has a humongous market capitalization of US$13.6b, 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. But either way, BioMarin Pharmaceutical has virtually no net debt, so it’s fair to say it does not have a heavy debt load! When analysing debt levels, the balance sheet is the obvious place to start. But it is future earnings, more than anything, that will determine BioMarin Pharmaceutical’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.
In the last year BioMarin Pharmaceutical wasn’t profitable at an EBIT level, but managed to grow its revenue by 20%, to US$1.8b. Shareholders probably have their fingers crossed that it can grow its way to profits.
Caveat Emptor
While we can certainly appreciate BioMarin Pharmaceutical’s revenue growth, its earnings before interest and tax (EBIT) loss is not ideal. To be specific the EBIT loss came in at US$9.8m. When we look at that and recall the liabilities on its balance sheet, relative to cash, it seems unwise to us for the company to have any debt. Quite frankly we think the balance sheet is far from match-fit, although it could be improved with time. Another cause for caution is that is bled US$8.7m in negative free cash flow over the last twelve months. So suffice it to say we do consider the stock to be risky. There’s no doubt that we learn most about debt from the balance sheet. However, not all investment risk resides within the balance sheet – far from it. For instance, we’ve identified 3 warning signs for BioMarin Pharmaceutical (1 shouldn’t be ignored) you should be aware of.
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.
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