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

David Iben put it well when he said, 'Volatility is not a risk we care about. What we care about is avoiding the permanent loss of capital.' 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. Importantly, Lexicon Pharmaceuticals, Inc. (NASDAQ:LXRX) does carry debt. But the more important question is: how much risk is that debt creating?

What Risk Does Debt Bring?

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. In the worst case scenario, a company can go bankrupt if it cannot pay its creditors. 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. Having said that, the most common situation is where a company manages its debt reasonably well - and to its own advantage. When we think about a company's use of debt, we first look at cash and debt together.

View our latest analysis for Lexicon Pharmaceuticals

What Is Lexicon Pharmaceuticals's Net Debt?

As you can see below, Lexicon Pharmaceuticals had US$99.5m of debt, at June 2024, which is about the same as the year before. You can click the chart for greater detail. However, it does have US$310.0m in cash offsetting this, leading to net cash of US$210.5m.

How Strong Is Lexicon Pharmaceuticals' Balance Sheet?

Zooming in on the latest balance sheet data, we can see that Lexicon Pharmaceuticals had liabilities of US$27.9m due within 12 months and liabilities of US$105.5m due beyond that. Offsetting these obligations, it had cash of US$310.0m as well as receivables valued at US$2.62m due within 12 months. So it can boast US$179.2m more liquid assets than total liabilities.

This surplus strongly suggests that Lexicon Pharmaceuticals has a rock-solid balance sheet (and the debt is of no concern whatsoever). 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! There's no doubt that we learn most about debt from the balance sheet. 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're focused on the future you can check out this free report showing analyst profit forecasts.

Over 12 months, Lexicon Pharmaceuticals reported revenue of US$3.6m, which is a gain of 795%, although it did not report any earnings before interest and tax. When it comes to revenue growth, that's like nailing the game winning 3-pointer!

So How Risky Is Lexicon Pharmaceuticals?

We have no doubt that loss making companies are, in general, riskier than profitable ones. And the fact is that over the last twelve months Lexicon Pharmaceuticals lost money at the earnings before interest and tax (EBIT) line. And over the same period it saw negative free cash outflow of US$196m and booked a US$202m accounting loss. But at least it has US$210.5m on the balance sheet to spend on growth, near-term. 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. While unprofitable companies can be risky, they can also grow hard and fast in those pre-profit years. When analysing debt levels, the balance sheet is the obvious place to start. However, not all investment risk resides within the balance sheet - far from it. Be aware that Lexicon Pharmaceuticals is showing 4 warning signs in our investment analysis , you should know about...

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.

Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team (at) simplywallst.com.

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.