Is BeiGene (NASDAQ:BGNE) Using Debt Sensibly?

Warren Buffett famously said, '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 note that BeiGene, Ltd. (NASDAQ:BGNE) does have debt on its balance sheet. But is this debt a concern to shareholders?

Why Does Debt Bring Risk?

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. In the worst case scenario, a company can go bankrupt if it cannot pay its creditors. 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. When we think about a company's use of debt, we first look at cash and debt together.

Check out the opportunities and risks within the US Biotechs industry.

What Is BeiGene's Debt?

As you can see below, BeiGene had US$649.3m of debt, at September 2022, which is about the same as the year before. You can click the chart for greater detail. However, its balance sheet shows it holds US$5.08b in cash, so it actually has US$4.43b net cash.

How Strong Is BeiGene's Balance Sheet?

According to the last reported balance sheet, BeiGene had liabilities of US$1.41b due within 12 months, and liabilities of US$659.5m due beyond 12 months. Offsetting these obligations, it had cash of US$5.08b as well as receivables valued at US$202.6m due within 12 months. So it actually has US$3.21b 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. The balance sheet is clearly the area to focus on when you are analysing debt. 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.

In the last year BeiGene wasn't profitable at an EBIT level, but managed to grow its revenue by 18%, to US$1.2b. We usually like to see faster growth from unprofitable companies, but each to their own.

So How Risky Is BeiGene?

We have no doubt that loss making companies are, in general, riskier than profitable ones. And in the last year BeiGene had an earnings before interest and tax (EBIT) loss, truth be told. Indeed, in that time it burnt through US$2.1b of cash and made a loss of US$2.1b. But the saving grace is the US$4.43b on the balance sheet. That means it could keep spending at its current rate for more than two years. 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. To that end, you should be aware of the 2 warning signs we've spotted with BeiGene .

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.

Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team (at) simplywallst.com.

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.