Warren Buffett famously said, 'Volatility is far from synonymous with risk.' 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. As with many other companies BeiGene, Ltd. (NASDAQ:BGNE) makes use of debt. But should shareholders be worried about its use of debt?
What Risk Does Debt Bring?
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. 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, 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. The first thing to do when considering how much debt a business uses is to look at its cash and debt together.
What Is BeiGene's Debt?
As you can see below, at the end of December 2021, BeiGene had US$629.7m of debt, up from US$518.7m a year ago. Click the image for more detail. However, it does have US$6.62b in cash offsetting this, leading to net cash of US$5.99b.
How Strong Is BeiGene's Balance Sheet?
According to the last reported balance sheet, BeiGene had liabilities of US$1.60b due within 12 months, and liabilities of US$803.4m due beyond 12 months. Offsetting this, it had US$6.62b in cash and US$500.2m in receivables that were due within 12 months. So it actually has US$4.71b more liquid assets than total liabilities.
This excess liquidity suggests that BeiGene is taking a careful approach to debt. Because it has plenty of assets, it is unlikely to have trouble with its lenders. Simply put, the fact that BeiGene 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 ultimately the future profitability of the business will decide if BeiGene can strengthen its balance sheet over time. So if you want to see what the professionals think, you might find this free report on analyst profit forecasts to be interesting.
Over 12 months, BeiGene reported revenue of US$1.2b, which is a gain of 281%, although it did not report any earnings before interest and tax. When it comes to revenue growth, that's like nailing the game winning 3-pointer!
So How Risky Is BeiGene?
We have no doubt that loss making companies are, in general, riskier than profitable ones. And the fact is that over the last twelve months BeiGene lost money at the earnings before interest and tax (EBIT) line. And over the same period it saw negative free cash outflow of US$1.6b and booked a US$1.4b accounting loss. While this does make the company a bit risky, it's important to remember it has net cash of US$5.99b. That kitty means the company can keep spending for growth for at least two years, at current rates. The good news for shareholders is that BeiGene has dazzling revenue growth, so there's a very good chance it can boost its free cash flow in the years to come. While unprofitable companies can be risky, they can also grow hard and fast in those pre-profit years. When analysing debt levels, the balance sheet is the obvious place to start. But ultimately, every company can contain risks that exist outside of the balance sheet. Case in point: We've spotted 3 warning signs for BeiGene 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.
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.