Does Neurocrine Biosciences (NASDAQ:NBIX) Have A Healthy Balance Sheet?

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.' 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 can see that Neurocrine Biosciences, Inc. (NASDAQ:NBIX) does use debt in its business. But the real question is whether this debt is making the company risky.

When Is Debt Dangerous?

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. In the worst case scenario, a company can go bankrupt if it cannot pay its creditors. 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.

View our latest analysis for Neurocrine Biosciences

What Is Neurocrine Biosciences's Debt?

The chart below, which you can click on for greater detail, shows that Neurocrine Biosciences had US$169.7m in debt in June 2023; about the same as the year before. But it also has US$976.7m in cash to offset that, meaning it has US$807.0m net cash.

How Strong Is Neurocrine Biosciences' Balance Sheet?

We can see from the most recent balance sheet that Neurocrine Biosciences had liabilities of US$582.5m falling due within a year, and liabilities of US$177.6m due beyond that. Offsetting these obligations, it had cash of US$976.7m as well as receivables valued at US$387.6m due within 12 months. So it can boast US$604.2m more liquid assets than total liabilities.

This surplus suggests that Neurocrine Biosciences has a conservative balance sheet, and could probably eliminate its debt without much difficulty. Simply put, the fact that Neurocrine Biosciences has more cash than debt is arguably a good indication that it can manage its debt safely.

In addition to that, we're happy to report that Neurocrine Biosciences has boosted its EBIT by 77%, thus reducing the spectre of future debt repayments. When analysing debt levels, the balance sheet is the obvious place to start. But it is future earnings, more than anything, that will determine Neurocrine Biosciences'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.

But our final consideration is also important, because a company cannot pay debt with paper profits; it needs cold hard cash. Neurocrine Biosciences 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, Neurocrine Biosciences recorded free cash flow worth a fulsome 94% of its EBIT, which is stronger than we'd usually expect. That positions it well to pay down debt if desirable to do so.

Summing Up

While we empathize with investors who find debt concerning, you should keep in mind that Neurocrine Biosciences has net cash of US$807.0m, as well as more liquid assets than liabilities. And it impressed us with free cash flow of US$281m, being 94% of its EBIT. So we don't think Neurocrine Biosciences's use of debt is risky. 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 2 warning signs with Neurocrine Biosciences , and understanding them should be part of your investment process.

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.