Neurocrine Biosciences (NASDAQ:NBIX) Could Easily Take On More Debt

Warren Buffett famously said, 'Volatility is far from synonymous with risk.' It's only natural to consider a company's balance sheet when you examine how risky it is, since debt is often involved when a business collapses. Importantly, Neurocrine Biosciences, Inc. (NASDAQ:NBIX) does carry debt. But is this debt a concern to shareholders?

Why Does Debt Bring Risk?

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. Ultimately, if the company can't fulfill its legal obligations to repay debt, shareholders could walk away with nothing. 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 examine debt levels, we first consider both cash and debt levels, together.

See our latest analysis for Neurocrine Biosciences

What Is Neurocrine Biosciences's Debt?

As you can see below, Neurocrine Biosciences had US$169.9m of debt, at September 2023, which is about the same as the year before. You can click the chart for greater detail. However, its balance sheet shows it holds US$1.10b in cash, so it actually has US$925.2m net cash.

A Look At Neurocrine Biosciences' Liabilities

Zooming in on the latest balance sheet data, we can see that Neurocrine Biosciences had liabilities of US$691.6m due within 12 months and liabilities of US$154.5m due beyond that. On the other hand, it had cash of US$1.10b and US$417.8m worth of receivables due within a year. So it can boast US$666.8m 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. 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 66%, 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 want to see what the professionals think, you might find this free report on analyst profit forecasts to be interesting.

Finally, a business needs free cash flow to pay off debt; accounting profits just don't cut it. 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 actually produced more free cash flow than EBIT. There's nothing better than incoming cash when it comes to staying in your lenders' good graces.

Summing Up

While it is always sensible to investigate a company's debt, in this case Neurocrine Biosciences has US$925.2m in net cash and a decent-looking balance sheet. The cherry on top was that in converted 115% of that EBIT to free cash flow, bringing in US$385m. So is Neurocrine Biosciences's debt a risk? It doesn't seem so to us. When analysing debt levels, the balance sheet is the obvious place to start. But ultimately, every company can contain risks that exist outside of the balance sheet. For example - Neurocrine Biosciences has 2 warning signs we think you should be aware of.

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.