We Think Neurocrine Biosciences (NASDAQ:NBIX) Can Manage Its Debt With Ease

Warren Buffett famously said, '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 real question is whether this debt is making the company risky.

What Risk Does Debt Bring?

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. In the worst case scenario, a company can go bankrupt if it cannot pay its creditors. 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. The first thing to do when considering how much debt a business uses is to look at its cash and debt together.

Check out our latest analysis for Neurocrine Biosciences

How Much Debt Does Neurocrine Biosciences Carry?

You can click the graphic below for the historical numbers, but it shows that Neurocrine Biosciences had US$169.5m of debt in March 2023, down from US$377.7m, one year before. However, it does have US$894.6m in cash offsetting this, leading to net cash of US$725.1m.

How Healthy Is Neurocrine Biosciences' Balance Sheet?

We can see from the most recent balance sheet that Neurocrine Biosciences had liabilities of US$374.1m falling due within a year, and liabilities of US$301.2m due beyond that. Offsetting this, it had US$894.6m in cash and US$391.6m in receivables that were due within 12 months. So it actually has US$610.9m 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. Succinctly put, Neurocrine Biosciences boasts net cash, so it's fair to say it does not have a heavy debt load!

In addition to that, we're happy to report that Neurocrine Biosciences has boosted its EBIT by 54%, thus reducing the spectre of future debt repayments. 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 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 three years, Neurocrine Biosciences generated free cash flow amounting to a very robust 80% of its EBIT, more than we'd expect. That positions it well to pay down debt if desirable to do so.

Summing Up

While it is always sensible to investigate a company's debt, in this case Neurocrine Biosciences has US$725.1m in net cash and a decent-looking balance sheet. The cherry on top was that in converted 80% of that EBIT to free cash flow, bringing in US$237m. 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. However, not all investment risk resides within the balance sheet - far from it. For example, we've discovered 3 warning signs for Neurocrine Biosciences that you should be aware of before investing here.

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.