Is Neurocrine Biosciences (NASDAQ:NBIX) A Risky Investment?

By
Simply Wall St
Published
April 11, 2022
NasdaqGS:NBIX
Source: Shutterstock

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.' 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 A Problem?

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. 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.

View our latest analysis for Neurocrine Biosciences

What Is Neurocrine Biosciences's Net Debt?

You can click the graphic below for the historical numbers, but it shows that as of December 2021 Neurocrine Biosciences had US$335.1m of debt, an increase on US$317.9m, over one year. However, it does have US$711.3m in cash offsetting this, leading to net cash of US$376.2m.

debt-equity-history-analysis
NasdaqGS:NBIX Debt to Equity History April 11th 2022

How Healthy Is Neurocrine Biosciences' Balance Sheet?

We can see from the most recent balance sheet that Neurocrine Biosciences had liabilities of US$245.8m falling due within a year, and liabilities of US$452.7m due beyond that. Offsetting this, it had US$711.3m in cash and US$185.5m in receivables that were due within 12 months. So it actually has US$198.3m more liquid assets than total liabilities.

This short term liquidity is a sign that Neurocrine Biosciences could probably pay off its debt with ease, as its balance sheet is far from stretched. Succinctly put, Neurocrine Biosciences boasts net cash, so it's fair to say it does not have a heavy debt load!

The modesty of its debt load may become crucial for Neurocrine Biosciences if management cannot prevent a repeat of the 37% cut to EBIT over the last year. When a company sees its earnings tank, it can sometimes find its relationships with its lenders turn sour. 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. While Neurocrine Biosciences has net cash on its balance sheet, it's still worth taking a look at its ability to convert earnings before interest and tax (EBIT) to free cash flow, to help us understand how quickly it is building (or eroding) that cash balance. Over the most recent three years, Neurocrine Biosciences recorded free cash flow worth 77% of its EBIT, which is around normal, given free cash flow excludes interest and tax. This free cash flow puts the company in a good position to pay down debt, when appropriate.

Summing up

While it is always sensible to investigate a company's debt, in this case Neurocrine Biosciences has US$376.2m in net cash and a decent-looking balance sheet. The cherry on top was that in converted 77% of that EBIT to free cash flow, bringing in US$233m. So we don't have any problem with Neurocrine Biosciences's use of debt. 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. To that end, you should be aware of the 3 warning signs we've spotted with Neurocrine Biosciences .

If, after all that, you're more interested in a fast growing company with a rock-solid balance sheet, then check out our list of net cash growth stocks without delay.

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