Health Check: How Prudently Does Intercept Pharmaceuticals (NASDAQ:ICPT) Use Debt?

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.' 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. Importantly, Intercept Pharmaceuticals, Inc. (NASDAQ:ICPT) does carry debt. But the real question is whether this debt is making the company risky.

When Is Debt A Problem?

Debt assists a business until the business has trouble paying it off, either with new capital or with free 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. When we examine debt levels, we first consider both cash and debt levels, together.

See our latest analysis for Intercept Pharmaceuticals

What Is Intercept Pharmaceuticals's Debt?

You can click the graphic below for the historical numbers, but it shows that Intercept Pharmaceuticals had US$332.3m of debt in September 2022, down from US$530.4m, one year before. However, it does have US$490.9m in cash offsetting this, leading to net cash of US$158.5m.

A Look At Intercept Pharmaceuticals' Liabilities

Zooming in on the latest balance sheet data, we can see that Intercept Pharmaceuticals had liabilities of US$221.6m due within 12 months and liabilities of US$230.1m due beyond that. On the other hand, it had cash of US$490.9m and US$27.6m worth of receivables due within a year. So it actually has US$66.7m more liquid assets than total liabilities.

This surplus suggests that Intercept Pharmaceuticals has a conservative balance sheet, and could probably eliminate its debt without much difficulty. Simply put, the fact that Intercept Pharmaceuticals has more cash than debt is arguably a good indication that it can manage its debt safely. When analysing debt levels, the balance sheet is the obvious place to start. But it is future earnings, more than anything, that will determine Intercept Pharmaceuticals's ability to maintain a healthy balance sheet going forward. 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 Intercept Pharmaceuticals wasn't profitable at an EBIT level, but managed to grow its revenue by 38%, to US$380m. With any luck the company will be able to grow its way to profitability.

So How Risky Is Intercept Pharmaceuticals?

We have no doubt that loss making companies are, in general, riskier than profitable ones. And in the last year Intercept Pharmaceuticals had an earnings before interest and tax (EBIT) loss, truth be told. And over the same period it saw negative free cash outflow of US$18m and booked a US$157m accounting loss. However, it has net cash of US$158.5m, so it has a bit of time before it will need more capital. With very solid revenue growth in the last year, Intercept Pharmaceuticals may be on a path to profitability. Pre-profit companies are often risky, but they can also offer great rewards. 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. Be aware that Intercept Pharmaceuticals is showing 2 warning signs in our investment analysis , you should know about...

When all is said and done, sometimes its easier to focus on companies that don't even need debt. Readers can access a list of growth stocks with zero net debt 100% free, right now.

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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.