Does Lexicon Pharmaceuticals (NASDAQ:LXRX) Have A Healthy Balance Sheet?

The external fund manager backed by Berkshire Hathaway's Charlie Munger, Li Lu, makes no bones about it when he says 'The biggest investment risk is not the volatility of prices, but whether you will suffer a permanent loss of capital.' So it seems the smart money knows that debt - which is usually involved in bankruptcies - is a very important factor, when you assess how risky a company is. We can see that Lexicon Pharmaceuticals, Inc. (NASDAQ:LXRX) does use debt in its business. But is this debt a concern to shareholders?

Why Does Debt Bring Risk?

Debt assists a business until the business has trouble paying it off, either with new capital or with free cash flow. In the worst case scenario, a company can go bankrupt if it cannot pay its creditors. 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. Having said that, the most common situation is where a company manages its debt reasonably well - and to its own advantage. The first step when considering a company's debt levels is to consider its cash and debt together.

View our latest analysis for Lexicon Pharmaceuticals

How Much Debt Does Lexicon Pharmaceuticals Carry?

You can click the graphic below for the historical numbers, but it shows that as of September 2022 Lexicon Pharmaceuticals had US$23.8m of debt, an increase on US$11.7m, over one year. However, its balance sheet shows it holds US$136.2m in cash, so it actually has US$112.4m net cash.

A Look At Lexicon Pharmaceuticals' Liabilities

According to the last reported balance sheet, Lexicon Pharmaceuticals had liabilities of US$18.4m due within 12 months, and liabilities of US$29.2m due beyond 12 months. Offsetting these obligations, it had cash of US$136.2m as well as receivables valued at US$39.0k due within 12 months. So it can boast US$88.6m more liquid assets than total liabilities.

It's good to see that Lexicon Pharmaceuticals has plenty of liquidity on its balance sheet, suggesting conservative management of liabilities. Given it has easily adequate short term liquidity, we don't think it will have any issues with its lenders. Succinctly put, Lexicon Pharmaceuticals boasts net cash, so it's fair to say it does not have a heavy debt load! 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 Lexicon 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.

Given its lack of meaningful operating revenue, Lexicon Pharmaceuticals shareholders no doubt hope it can fund itself until it has a profitable product.

So How Risky Is Lexicon Pharmaceuticals?

Statistically speaking companies that lose money are riskier than those that make money. And in the last year Lexicon Pharmaceuticals 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$90m and booked a US$97m accounting loss. With only US$112.4m on the balance sheet, it would appear that its going to need to raise capital again soon. 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. 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. Case in point: We've spotted 3 warning signs for Lexicon Pharmaceuticals you should be aware of, and 1 of them is concerning.

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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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.