Stock Analysis

Is Ligand Pharmaceuticals (NASDAQ:LGND) Using Too Much Debt?

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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.' 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. We can see that Ligand Pharmaceuticals Incorporated (NASDAQ:LGND) does use debt in its business. But the more important question is: how much risk is that debt creating?

When Is Debt A Problem?

Debt and other liabilities become risky for a business when it cannot easily fulfill those obligations, either with free cash flow or by raising capital at an attractive price. Ultimately, if the company can't fulfill its legal obligations to repay debt, shareholders could walk away with nothing. 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. Of course, plenty of companies use debt to fund growth, without any negative consequences. The first step when considering a company's debt levels is to consider its cash and debt together.

See our latest analysis for Ligand Pharmaceuticals

What Is Ligand Pharmaceuticals's Net Debt?

As you can see below, Ligand Pharmaceuticals had US$442.3m of debt at December 2020, down from US$639.0m a year prior. However, it does have US$411.2m in cash offsetting this, leading to net debt of about US$31.1m.

NasdaqGM:LGND Debt to Equity History May 3rd 2021

How Healthy Is Ligand Pharmaceuticals' Balance Sheet?

According to the last reported balance sheet, Ligand Pharmaceuticals had liabilities of US$100.1m due within 12 months, and liabilities of US$552.6m due beyond 12 months. Offsetting these obligations, it had cash of US$411.2m as well as receivables valued at US$59.1m due within 12 months. So it has liabilities totalling US$182.5m more than its cash and near-term receivables, combined.

Given Ligand Pharmaceuticals has a market capitalization of US$2.43b, it's hard to believe these liabilities pose much threat. But there are sufficient liabilities that we would certainly recommend shareholders continue to monitor the balance sheet, going forward. Carrying virtually no net debt, Ligand Pharmaceuticals has a very light debt load indeed.

We use two main ratios to inform us about debt levels relative to earnings. The first is net debt divided by earnings before interest, tax, depreciation, and amortization (EBITDA), while the second is how many times its earnings before interest and tax (EBIT) covers its interest expense (or its interest cover, for short). The advantage of this approach is that we take into account both the absolute quantum of debt (with net debt to EBITDA) and the actual interest expenses associated with that debt (with its interest cover ratio).

Given net debt is only 0.54 times EBITDA, it is initially surprising to see that Ligand Pharmaceuticals's EBIT has low interest coverage of 1.5 times. So one way or the other, it's clear the debt levels are not trivial. We also note that Ligand Pharmaceuticals improved its EBIT from a last year's loss to a positive US$29m. 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, while the tax-man may adore accounting profits, lenders only accept cold hard cash. So it's worth checking how much of the earnings before interest and tax (EBIT) is backed by free cash flow. Over the last year, Ligand Pharmaceuticals actually produced more free cash flow than EBIT. That sort of strong cash conversion gets us as excited as the crowd when the beat drops at a Daft Punk concert.

Our View

The good news is that Ligand Pharmaceuticals's demonstrated ability to convert EBIT to free cash flow delights us like a fluffy puppy does a toddler. But the stark truth is that we are concerned by its interest cover. All these things considered, it appears that Ligand Pharmaceuticals can comfortably handle its current debt levels. On the plus side, this leverage can boost shareholder returns, but the potential downside is more risk of loss, so it's worth monitoring the balance sheet. 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, we've discovered 4 warning signs for Ligand Pharmaceuticals (1 is a bit concerning!) that you should be aware of before investing here.

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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What are the risks and opportunities for Ligand Pharmaceuticals?

Ligand Pharmaceuticals Incorporated, a biopharmaceutical company, focuses on developing or acquiring technologies that help pharmaceutical companies to discover and develop medicines worldwide.

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  • Trading at 55.4% below our estimate of its fair value

  • Earnings are forecast to grow 101.49% per year


  • Significant insider selling over the past 3 months

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