The external fund manager backed by Berkshire Hathaway’s Charlie Munger, Li Lu, makes no bones about it when he says ‘The biggest investment risk is not the volatility of prices, but whether you will suffer a permanent loss of capital. 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. As with many other companies Neurocrine Biosciences, Inc. (NASDAQ:NBIX) makes use of debt. But is this debt a concern to shareholders?
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. Ultimately, if the company can’t fulfill its legal obligations to repay debt, shareholders could walk away with nothing. 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. 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.
How Much Debt Does Neurocrine Biosciences Carry?
As you can see below, at the end of December 2019, Neurocrine Biosciences had US$408.8m of debt, up from US$388.5m a year ago. Click the image for more detail. But on the other hand it also has US$670.5m in cash, leading to a US$261.7m net cash position.
How Healthy Is Neurocrine Biosciences’s Balance Sheet?
According to the last reported balance sheet, Neurocrine Biosciences had liabilities of US$565.3m due within 12 months, and liabilities of US$103.8m due beyond 12 months. Offsetting this, it had US$670.5m in cash and US$126.6m in receivables that were due within 12 months. So it actually has US$128.0m more liquid assets than total liabilities.
Having regard to Neurocrine Biosciences’s size, it seems that its liquid assets are well balanced with its total liabilities. So while it’s hard to imagine that the US$7.11b company is struggling for cash, we still think it’s worth monitoring its balance sheet. Succinctly put, Neurocrine Biosciences boasts net cash, so it’s fair to say it does not have a heavy debt load!
Better yet, Neurocrine Biosciences grew its EBIT by 444% last year, which is an impressive improvement. That boost will make it even easier to pay down debt going forward. The balance sheet is clearly the area to focus on when you are analysing debt. 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. During the last two years, Neurocrine Biosciences produced sturdy free cash flow equating to 80% of its EBIT, about what we’d expect. This cold hard cash means it can reduce its debt when it wants to.
While we empathize with investors who find debt concerning, you should keep in mind that Neurocrine Biosciences has net cash of US$261.7m, as well as more liquid assets than liabilities. And it impressed us with its EBIT growth of 444% over the last year. So is Neurocrine Biosciences’s debt a risk? It doesn’t seem so to us. 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. Be aware that Neurocrine Biosciences is showing 3 warning signs in our investment analysis , you should know about…
When all is said and done, sometimes its easier to focus on companies that don’t even need debt. Readers can access a list of growth stocks with zero net debt 100% free, right now.
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