We Think Ligand Pharmaceuticals (NASDAQ:LGND) Can Stay On Top Of Its Debt

Some say volatility, rather than debt, is the best way to think about risk as an investor, but Warren Buffett famously said that '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?

What Risk Does Debt Bring?

Debt is a tool to help businesses grow, but if a business is incapable of paying off its lenders, then it exists at their mercy. Ultimately, if the company can't fulfill its legal obligations to repay debt, shareholders could walk away with nothing. 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, 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. When we think about a company's use of debt, we first look at cash and debt together.

Check out our latest analysis for Ligand Pharmaceuticals

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$76.8m at the end of March 2023, a reduction from US$176.5m over a year. But on the other hand it also has US$282.7m in cash, leading to a US$205.9m net cash position.

How Healthy Is Ligand Pharmaceuticals' Balance Sheet?

We can see from the most recent balance sheet that Ligand Pharmaceuticals had liabilities of US$98.9m falling due within a year, and liabilities of US$65.8m due beyond that. Offsetting these obligations, it had cash of US$282.7m as well as receivables valued at US$29.2m due within 12 months. So it can boast US$147.1m more liquid assets than total liabilities.

This short term liquidity is a sign that Ligand Pharmaceuticals could probably pay off its debt with ease, as its balance sheet is far from stretched. Succinctly put, Ligand Pharmaceuticals boasts net cash, so it's fair to say it does not have a heavy debt load!

The modesty of its debt load may become crucial for Ligand Pharmaceuticals if management cannot prevent a repeat of the 76% cut to EBIT over the last year. When it comes to paying off debt, falling earnings are no more useful than sugary sodas are for your health. 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 want to see what the professionals think, you might find this free report on analyst profit forecasts to be interesting.

Finally, a business needs free cash flow to pay off debt; accounting profits just don't cut it. Ligand Pharmaceuticals may have net cash on the balance sheet, but it is still interesting to look at how well the business converts its earnings before interest and tax (EBIT) to free cash flow, because that will influence both its need for, and its capacity to manage debt. Over the last three years, Ligand Pharmaceuticals actually produced more free cash flow than EBIT. There's nothing better than incoming cash when it comes to staying in your lenders' good graces.

Summing Up

While it is always sensible to investigate a company's debt, in this case Ligand Pharmaceuticals has US$205.9m in net cash and a decent-looking balance sheet. The cherry on top was that in converted 235% of that EBIT to free cash flow, bringing in US$105m. So we don't have any problem with Ligand Pharmaceuticals's use of debt. The balance sheet is clearly the area to focus on when you are analysing debt. But ultimately, every company can contain risks that exist outside of the balance sheet. We've identified 4 warning signs with Ligand Pharmaceuticals (at least 1 which shouldn't be ignored) , and understanding them should be part of your investment process.

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.