Neurocrine Biosciences (NASDAQ:NBIX) Seems To Use Debt Rather Sparingly

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 seems the smart money knows that debt - which is usually involved in bankruptcies - is a very important factor, when you assess how risky a company is. Importantly, Neurocrine Biosciences, Inc. (NASDAQ:NBIX) does carry debt. But the more important question is: how much risk is that debt creating?

Why Does Debt Bring Risk?

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. While that is not too common, we often do see indebted companies permanently diluting shareholders because lenders force them to raise capital at a distressed price. 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 Neurocrine Biosciences

How Much Debt Does Neurocrine Biosciences Carry?

The chart below, which you can click on for greater detail, shows that Neurocrine Biosciences had US$170.1m in debt in December 2023; about the same as the year before. But on the other hand it also has US$1.03b in cash, leading to a US$861.5m net cash position.

A Look At Neurocrine Biosciences' Liabilities

According to the last reported balance sheet, Neurocrine Biosciences had liabilities of US$654.8m due within 12 months, and liabilities of US$364.6m due beyond 12 months. On the other hand, it had cash of US$1.03b and US$439.3m worth of receivables due within a year. So it can boast US$451.5m 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.

On top of that, Neurocrine Biosciences grew its EBIT by 59% over the last twelve months, and that growth will make it easier to handle its debt. 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 Neurocrine Biosciences can strengthen its balance sheet over time. So if you're focused on the future you can check out this free report showing analyst profit forecasts.

Finally, while the tax-man may adore accounting profits, lenders only accept 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. Happily for any shareholders, Neurocrine Biosciences actually produced more free cash flow than EBIT over the last three years. That sort of strong cash conversion gets us as excited as the crowd when the beat drops at a Daft Punk concert.

Summing Up

While we empathize with investors who find debt concerning, you should keep in mind that Neurocrine Biosciences has net cash of US$861.5m, as well as more liquid assets than liabilities. The cherry on top was that in converted 108% of that EBIT to free cash flow, bringing in US$362m. 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. 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.