Here's Why Lexicon Pharmaceuticals (NASDAQ:LXRX) Can Manage Its Debt Despite Losing Money

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.' So it might be obvious that you need to consider debt, when you think about how risky any given stock is, because too much debt can sink a company. We note that Lexicon Pharmaceuticals, Inc. (NASDAQ:LXRX) does have debt on its balance sheet. But is this debt a concern to shareholders?

When Is Debt Dangerous?

Debt assists a business until the business has trouble paying it off, either with new capital or with free 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. Having said that, the most common situation is where a company manages its debt reasonably well - and to its own advantage. When we examine debt levels, we first consider both cash and debt levels, 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 June 2023 Lexicon Pharmaceuticals had US$98.8m of debt, an increase on US$23.6m, over one year. However, its balance sheet shows it holds US$256.7m in cash, so it actually has US$158.0m net cash.

A Look At Lexicon Pharmaceuticals' Liabilities

Zooming in on the latest balance sheet data, we can see that Lexicon Pharmaceuticals had liabilities of US$26.1m due within 12 months and liabilities of US$104.3m due beyond that. On the other hand, it had cash of US$256.7m and US$685.0k worth of receivables due within a year. So it can boast US$127.1m more liquid assets than total liabilities.

This surplus liquidity suggests that Lexicon Pharmaceuticals' balance sheet could take a hit just as well as Homer Simpson's head can take a punch. On this view, lenders should feel as safe as the beloved of a black-belt karate master. Succinctly put, Lexicon Pharmaceuticals boasts net cash, so it's fair to say it does not have a heavy debt load! When analysing debt levels, the balance sheet is the obvious place to start. But it is future earnings, more than anything, that will determine Lexicon Pharmaceuticals's ability to maintain a healthy balance sheet going forward. So if you want to see what the professionals think, you might find this free report on analyst profit forecasts to be interesting.

Since Lexicon Pharmaceuticals doesn't have significant operating revenue, shareholders may be hoping it comes up with a great new product, before it runs out of money.

So How Risky Is Lexicon Pharmaceuticals?

Statistically speaking companies that lose money are riskier than those that make money. And the fact is that over the last twelve months Lexicon Pharmaceuticals lost money at the earnings before interest and tax (EBIT) line. Indeed, in that time it burnt through US$112m of cash and made a loss of US$131m. Given it only has net cash of US$158.0m, the company may need to raise more capital if it doesn't reach break-even soon. The good news for shareholders is that Lexicon Pharmaceuticals has dazzling revenue growth, so there's a very good chance it can boost its free cash flow in the years to come. High growth pre-profit companies may well be risky, but they can also offer great rewards. The balance sheet is clearly the area to focus on when you are analysing debt. However, not all investment risk resides within the balance sheet - far from it. We've identified 4 warning signs with Lexicon Pharmaceuticals (at least 1 which makes us a bit uncomfortable) , and understanding them should be part of your investment process.

If you're interested in investing in businesses that can grow profits without the burden of debt, then check out this free list of growing businesses that have net cash on the balance sheet.

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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.