Is BioMarin Pharmaceutical (NASDAQ:BMRN) A Risky Investment?

The external fund manager backed by Berkshire Hathaway's Charlie Munger, Li Lu, makes no bones about it when he says 'The biggest investment risk is not the volatility of prices, but whether you will suffer a 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, BioMarin Pharmaceutical Inc. (NASDAQ:BMRN) does carry debt. But is this debt a concern to shareholders?

We've found 21 US stocks that are forecast to pay a dividend yield of over 6% next year. See the full list for free.

Why Does Debt Bring Risk?

Debt assists a business until the business has trouble paying it off, either with new capital or with free cash flow. Part and parcel of capitalism is the process of 'creative destruction' where failed businesses are mercilessly liquidated by their bankers. However, a more common (but still painful) scenario is that it has to raise new equity capital at a low price, thus permanently diluting shareholders. Of course, plenty of companies use debt to fund growth, without any negative consequences. When we think about a company's use of debt, we first look at cash and debt together.

What Is BioMarin Pharmaceutical's Debt?

As you can see below, BioMarin Pharmaceutical had US$595.1m of debt at December 2024, down from US$1.09b a year prior. But on the other hand it also has US$1.14b in cash, leading to a US$542.6m net cash position.

How Strong Is BioMarin Pharmaceutical's Balance Sheet?

According to the last reported balance sheet, BioMarin Pharmaceutical had liabilities of US$607.0m due within 12 months, and liabilities of US$724.0m due beyond 12 months. On the other hand, it had cash of US$1.14b and US$660.5m worth of receivables due within a year. So it can boast US$467.3m more liquid assets than total liabilities.

This surplus suggests that BioMarin Pharmaceutical has a conservative balance sheet, and could probably eliminate its debt without much difficulty. Simply put, the fact that BioMarin Pharmaceutical has more cash than debt is arguably a good indication that it can manage its debt safely.

Check out our latest analysis for BioMarin Pharmaceutical

Better yet, BioMarin Pharmaceutical grew its EBIT by 207% last year, which is an impressive improvement. If maintained that growth will make the debt even more manageable in the years ahead. 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.

Finally, while the tax-man may adore accounting profits, lenders only accept cold hard cash. BioMarin Pharmaceutical 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. Over the last three years, BioMarin Pharmaceutical recorded free cash flow worth a fulsome 84% of its EBIT, which is stronger than we'd usually expect. That puts it in a very strong position to pay down debt.

Summing Up

While we empathize with investors who find debt concerning, you should keep in mind that BioMarin Pharmaceutical has net cash of US$542.6m, as well as more liquid assets than liabilities. The cherry on top was that in converted 84% of that EBIT to free cash flow, bringing in US$485m. So is BioMarin Pharmaceutical's debt a risk? It doesn't seem so to us. Another factor that would give us confidence in BioMarin Pharmaceutical would be if insiders have been buying shares: if you're conscious of that signal too, you can find out instantly by clicking this link.

If, after all that, you're more interested in a fast growing company with a rock-solid balance sheet, then check out our list of net cash growth stocks without delay.

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.