Is Legend Biotech (NASDAQ:LEGN) 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.' 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, Legend Biotech Corporation (NASDAQ:LEGN) does carry debt. But should shareholders be worried about its use of debt?

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. Ultimately, if the company can't fulfill its legal obligations to repay debt, shareholders could walk away with nothing. However, a more usual (but still expensive) situation is where a company must dilute shareholders at a cheap share price simply to get debt under control. 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. The first step when considering a company's debt levels is to consider its cash and debt together.

View our latest analysis for Legend Biotech

What Is Legend Biotech's Net Debt?

The image below, which you can click on for greater detail, shows that at June 2023 Legend Biotech had debt of US$270.6m, up from US$189.2m in one year. But it also has US$1.51b in cash to offset that, meaning it has US$1.24b net cash.

How Healthy Is Legend Biotech's Balance Sheet?

The latest balance sheet data shows that Legend Biotech had liabilities of US$201.4m due within a year, and liabilities of US$322.2m falling due after that. Offsetting this, it had US$1.51b in cash and US$62.9m in receivables that were due within 12 months. So it actually has US$1.05b more liquid assets than total liabilities.

This surplus suggests that Legend Biotech has a conservative balance sheet, and could probably eliminate its debt without much difficulty. Succinctly put, Legend Biotech boasts net cash, 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 ultimately the future profitability of the business will decide if Legend Biotech can strengthen its balance sheet over time. So if you're focused on the future you can check out this free report showing analyst profit forecasts.

Over 12 months, Legend Biotech reported revenue of US$165m, which is a gain of 72%, although it did not report any earnings before interest and tax. With any luck the company will be able to grow its way to profitability.

So How Risky Is Legend Biotech?

By their very nature companies that are losing money are more risky than those with a long history of profitability. And we do note that Legend Biotech had an earnings before interest and tax (EBIT) loss, over the last year. And over the same period it saw negative free cash outflow of US$378m and booked a US$532m accounting loss. But at least it has US$1.24b on the balance sheet to spend on growth, near-term. Legend Biotech's revenue growth shone bright over the last year, so it may well be in a position to turn a profit in due course. Pre-profit companies are often risky, but they can also offer great rewards. 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 1 warning sign for Legend Biotech that you should be aware of.

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.