Warren Buffett famously said, 'Volatility is far from synonymous with risk.' 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 Ligand Pharmaceuticals Incorporated (NASDAQ:LGND) does use debt in its business. But is this debt a concern to shareholders?
When Is Debt Dangerous?
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. Part and parcel of capitalism is the process of 'creative destruction' where failed businesses are mercilessly liquidated by their bankers. 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. Of course, the upside of debt is that it often represents cheap capital, especially when it replaces dilution in a company with the ability to reinvest at high rates of return. The first step when considering a company's debt levels is to consider its cash and debt together.
What Is Ligand Pharmaceuticals's Net Debt?
The image below, which you can click on for greater detail, shows that Ligand Pharmaceuticals had debt of US$316.9m at the end of September 2021, a reduction from US$455.0m over a year. However, it does have US$323.2m in cash offsetting this, leading to net cash of US$6.32m.
A Look At Ligand Pharmaceuticals' Liabilities
Zooming in on the latest balance sheet data, we can see that Ligand Pharmaceuticals had liabilities of US$36.3m due within 12 months and liabilities of US$425.3m due beyond that. On the other hand, it had cash of US$323.2m and US$70.7m worth of receivables due within a year. So it has liabilities totalling US$67.7m more than its cash and near-term receivables, combined.
Given Ligand Pharmaceuticals has a market capitalization of US$2.58b, it's hard to believe these liabilities pose much threat. Having said that, it's clear that we should continue to monitor its balance sheet, lest it change for the worse. While it does have liabilities worth noting, Ligand Pharmaceuticals also has more cash than debt, so we're pretty confident it can manage its debt safely.
Notably, Ligand Pharmaceuticals's EBIT launched higher than Elon Musk, gaining a whopping 873% on last year. 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 Ligand Pharmaceuticals 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.
Finally, a business needs free cash flow to pay off debt; accounting profits just don't cut it. While Ligand Pharmaceuticals has net cash on its balance sheet, it's still worth taking a look at its ability to convert earnings before interest and tax (EBIT) to free cash flow, to help us understand how quickly it is building (or eroding) that cash balance. Happily for any shareholders, Ligand Pharmaceuticals actually produced more free cash flow than EBIT over the last three years. There's nothing better than incoming cash when it comes to staying in your lenders' good graces.
While it is always sensible to look at a company's total liabilities, it is very reassuring that Ligand Pharmaceuticals has US$6.32m in net cash. The cherry on top was that in converted 1,057% of that EBIT to free cash flow, bringing in US$45m. So is Ligand Pharmaceuticals's debt a risk? It doesn't seem so to us. 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. To that end, you should learn about the 5 warning signs we've spotted with Ligand Pharmaceuticals (including 1 which can't be ignored) .
Of course, if you're the type of investor who prefers buying stocks without the burden of debt, then don't hesitate to discover our exclusive list of net cash growth stocks, today.
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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.
Ligand Pharmaceuticals Incorporated, a biopharmaceutical company, focuses on developing or acquiring technologies that help pharmaceutical companies to discover and develop medicines worldwide.
Excellent balance sheet and fair value.