Is Legend Biotech (NASDAQ:LEGN) Weighed On By Its Debt Load?

Howard Marks put it nicely when he said that, rather than worrying about share price volatility, 'The possibility of permanent loss is the risk I worry about... and every practical investor I know worries about.' 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. We can see that Legend Biotech Corporation (NASDAQ:LEGN) does use debt in its business. But should shareholders be worried about its use of debt?

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. Part and parcel of capitalism is the process of 'creative destruction' where failed businesses are mercilessly liquidated by their bankers. 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 thing to do when considering how much debt a business uses is to look at its cash and debt together.

See our latest analysis for Legend Biotech

What Is Legend Biotech's Net Debt?

As you can see below, at the end of September 2021, Legend Biotech had US$70.5m of debt, up from none a year ago. Click the image for more detail. However, its balance sheet shows it holds US$635.9m in cash, so it actually has US$565.4m net cash.

How Healthy Is Legend Biotech's Balance Sheet?

The latest balance sheet data shows that Legend Biotech had liabilities of US$275.4m due within a year, and liabilities of US$312.5m falling due after that. Offsetting these obligations, it had cash of US$635.9m as well as receivables valued at US$1.50m due within 12 months. So it actually has US$49.5m more liquid assets than total liabilities.

Having regard to Legend Biotech's size, it seems that its liquid assets are well balanced with its total liabilities. So while it's hard to imagine that the US$7.28b company is struggling for cash, we still think it's worth monitoring its balance sheet. Simply put, the fact that Legend Biotech has more cash than debt is arguably a good indication that it can manage its debt safely. The balance sheet is clearly the area to focus on when you are analysing debt. 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$93m, which is a gain of 59%, although it did not report any earnings before interest and tax. Shareholders probably have their fingers crossed that it can grow its way to profits.

So How Risky Is Legend Biotech?

We have no doubt that loss making companies are, in general, riskier than profitable ones. And in the last year Legend Biotech 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$245m and booked a US$356m accounting loss. But at least it has US$565.4m 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. The balance sheet is clearly the area to focus on when you are analysing debt. However, not all investment risk resides within the balance sheet - far from it. For example - Legend Biotech has 1 warning sign we think you should be aware of.

At the end of the day, it's often better to focus on companies that are free from net debt. You can access our special list of such companies (all with a track record of profit growth). It's free.

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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.