Is Legend Biotech (NASDAQ:LEGN) A Risky Investment?

David Iben put it well when he said, 'Volatility is not a risk we care about. What we care about is avoiding the 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, Legend Biotech Corporation (NASDAQ:LEGN) does carry debt. But is this debt a concern to shareholders?

What Risk Does Debt Bring?

Debt assists a business until the business has trouble paying it off, either with new capital or with free cash flow. In the worst case scenario, a company can go bankrupt if it cannot pay its creditors. However, a more frequent (but still costly) occurrence is where a company must issue shares at bargain-basement prices, permanently diluting shareholders, just to shore up its balance sheet. Of course, plenty of companies use debt to fund growth, without any negative consequences. When we examine debt levels, we first consider both cash and debt levels, together.

Check out our latest analysis for Legend Biotech

What Is Legend Biotech's Net Debt?

As you can see below, at the end of September 2023, Legend Biotech had US$275.9m of debt, up from US$260.9m a year ago. Click the image for more detail. However, it does have US$1.42b in cash offsetting this, leading to net cash of US$1.15b.

How Healthy Is Legend Biotech's Balance Sheet?

Zooming in on the latest balance sheet data, we can see that Legend Biotech had liabilities of US$175.2m due within 12 months and liabilities of US$324.5m due beyond that. Offsetting these obligations, it had cash of US$1.42b as well as receivables valued at US$49.7m due within 12 months. So it actually has US$973.8m more liquid assets than total liabilities.

This short term liquidity is a sign that Legend Biotech could probably pay off its debt with ease, as its balance sheet is far from stretched. 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 it is future earnings, more than anything, that will determine Legend Biotech'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.

Over 12 months, Legend Biotech reported revenue of US$233m, which is a gain of 120%, although it did not report any earnings before interest and tax. So there's no doubt that shareholders are cheering for growth

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 in the last year Legend Biotech had an earnings before interest and tax (EBIT) loss, truth be told. Indeed, in that time it burnt through US$371m of cash and made a loss of US$509m. But the saving grace is the US$1.15b on the balance sheet. 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 Legend Biotech 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. Be aware that Legend Biotech is showing 1 warning sign in our investment analysis , you should know about...

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.

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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.