Legendary fund manager Li Lu (who Charlie Munger backed) once said, '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. As with many other companies Legend Biotech Corporation (NASDAQ:LEGN) makes use of debt. But the more important question is: how much risk is that debt creating?
When Is Debt Dangerous?
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. 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. 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 thing to do when considering how much debt a business uses is to look at its cash and debt together.
What Is Legend Biotech's Debt?
The image below, which you can click on for greater detail, shows that at June 2021 Legend Biotech had debt of US$17.3m, up from none in one year. But it also has US$692.7m in cash to offset that, meaning it has US$675.4m net cash.
A Look At Legend Biotech's Liabilities
We can see from the most recent balance sheet that Legend Biotech had liabilities of US$261.1m falling due within a year, and liabilities of US$274.1m due beyond that. Offsetting this, it had US$692.7m in cash and US$15.0m in receivables that were due within 12 months. So it actually has US$172.5m 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$89m, which is a gain of 39%, 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?
Statistically speaking companies that lose money are riskier than those that make money. 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$259m of cash and made a loss of US$297m. However, it has net cash of US$675.4m, so it has a bit of time before it will need more capital. 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. By investing before those profits, shareholders take on more risk in the hope of bigger rewards. There's no doubt that we learn most about debt from the balance sheet. But ultimately, every company can contain risks that exist outside of the balance sheet. For example - Legend Biotech has 1 warning sign we think you should be aware of.
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.
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