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

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.' 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?

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. Ultimately, if the company can't fulfill its legal obligations to repay debt, shareholders could walk away with nothing. 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, debt can be an important tool in businesses, particularly capital heavy businesses. When we think about a company's use of debt, we first look at cash and debt together.

Check out our latest analysis for Legend Biotech

What Is Legend Biotech's Net Debt?

You can click the graphic below for the historical numbers, but it shows that as of December 2022 Legend Biotech had US$260.9m of debt, an increase on US$120.5m, over one year. But it also has US$1.03b in cash to offset that, meaning it has US$764.7m net cash.

How Strong Is Legend Biotech's Balance Sheet?

The latest balance sheet data shows that Legend Biotech had liabilities of US$297.8m due within a year, and liabilities of US$288.9m falling due after that. On the other hand, it had cash of US$1.03b and US$45.5m worth of receivables due within a year. So it actually has US$484.5m 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! There's no doubt that we learn most about debt from the balance sheet. 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.

In the last year Legend Biotech wasn't profitable at an EBIT level, but managed to grow its revenue by 70%, to US$117m. Shareholders probably have their fingers crossed that it can grow its way to profits.

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. And over the same period it saw negative free cash outflow of US$224m and booked a US$446m accounting loss. But at least it has US$764.7m 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 2 warning signs 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.