Is Madrigal Pharmaceuticals (NASDAQ:MDGL) Using Debt Sensibly?

Warren Buffett famously said, '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 note that Madrigal Pharmaceuticals, Inc. (NASDAQ:MDGL) does have debt on its balance sheet. But is this debt a concern to shareholders?

When Is Debt A Problem?

Generally speaking, debt only becomes a real problem when a company can't easily pay it off, either by raising capital or with its own cash flow. Part and parcel of capitalism is the process of 'creative destruction' where failed businesses are mercilessly liquidated by their bankers. However, a more frequent (but still costly) occurrence is where a company must issue shares at bargain-basement prices, permanently diluting shareholders, just to shore up its balance sheet. By replacing dilution, though, debt can be an extremely good tool for businesses that need capital to invest in growth at high rates of return. When we examine debt levels, we first consider both cash and debt levels, together.

See our latest analysis for Madrigal Pharmaceuticals

What Is Madrigal Pharmaceuticals's Net Debt?

The chart below, which you can click on for greater detail, shows that Madrigal Pharmaceuticals had US$117.1m in debt in September 2024; about the same as the year before. However, it does have US$998.6m in cash offsetting this, leading to net cash of US$881.5m.

How Strong Is Madrigal Pharmaceuticals' Balance Sheet?

According to the last reported balance sheet, Madrigal Pharmaceuticals had liabilities of US$177.8m due within 12 months, and liabilities of US$118.3m due beyond 12 months. Offsetting these obligations, it had cash of US$998.6m as well as receivables valued at US$30.5m due within 12 months. So it can boast US$733.0m more liquid assets than total liabilities.

This surplus suggests that Madrigal Pharmaceuticals has a conservative balance sheet, and could probably eliminate its debt without much difficulty. Simply put, the fact that Madrigal Pharmaceuticals has more cash than debt is arguably a good indication that it can manage its debt safely. There's no doubt that we learn most about debt from the balance sheet. But ultimately the future profitability of the business will decide if Madrigal 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.

While it hasn't made a profit, at least Madrigal Pharmaceuticals booked its first revenue as a publicly listed company, in the last twelve months.

So How Risky Is Madrigal Pharmaceuticals?

By their very nature companies that are losing money are more risky than those with a long history of profitability. And the fact is that over the last twelve months Madrigal Pharmaceuticals lost money at the earnings before interest and tax (EBIT) line. Indeed, in that time it burnt through US$438m of cash and made a loss of US$519m. But at least it has US$881.5m on the balance sheet to spend on growth, near-term. 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. 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. For instance, we've identified 1 warning sign for Madrigal Pharmaceuticals that you should be aware of.

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.