Legend Biotech (NASDAQ:LEGN) Has Debt But No Earnings; Should You Worry?

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.' It's only natural to consider a company's balance sheet when you examine how risky it is, since debt is often involved when a business collapses. Importantly, Legend Biotech Corporation (NASDAQ:LEGN) does carry debt. But should shareholders be worried about its use of debt?

When Is Debt A Problem?

Generally speaking, debt only becomes a real problem when a company can't easily pay it off, either by raising capital or with its own cash flow. If things get really bad, the lenders can take control of the business. However, a more common (but still painful) scenario is that it has to raise new equity capital at a low price, thus permanently diluting shareholders. Of course, debt can be an important tool in businesses, particularly capital heavy businesses. The first step when considering a company's debt levels is to consider its cash and debt together.

See 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 2021 Legend Biotech had US$120.5m of debt, an increase on US$327.0k, over one year. However, its balance sheet shows it holds US$882.4m in cash, so it actually has US$761.9m net cash.

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$280.3m due within 12 months and liabilities of US$366.9m due beyond that. On the other hand, it had cash of US$882.4m and US$57.4m worth of receivables due within a year. So it can boast US$292.7m 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. 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$92m, which is a gain of 16%, although it did not report any earnings before interest and tax. That rate of growth is a bit slow for our taste, but it takes all types to make a world.

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. Indeed, in that time it burnt through US$246m of cash and made a loss of US$386m. But at least it has US$761.9m on the balance sheet to spend on growth, near-term. Even though its balance sheet seems sufficiently liquid, debt always makes us a little nervous if a company doesn't produce free cash flow regularly. 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. These risks can be hard to spot. Every company has them, and we've spotted 1 warning sign for Legend Biotech you should know about.

If, after all that, you're more interested in a fast growing company with a rock-solid balance sheet, then check out our list of net cash growth stocks without delay.

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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.