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. As with many other companies Neurocrine Biosciences, Inc. (NASDAQ:NBIX) makes use of debt. But should shareholders be worried about its use of debt?
When Is Debt A Problem?
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. Of course, debt can be an important tool in businesses, particularly capital heavy businesses. The first step when considering a company's debt levels is to consider its cash and debt together.
What Is Neurocrine Biosciences's Net Debt?
The image below, which you can click on for greater detail, shows that Neurocrine Biosciences had debt of US$330.7m at the end of September 2021, a reduction from US$425.0m over a year. But it also has US$765.9m in cash to offset that, meaning it has US$435.2m net cash.
How Strong Is Neurocrine Biosciences' Balance Sheet?
The latest balance sheet data shows that Neurocrine Biosciences had liabilities of US$225.9m due within a year, and liabilities of US$445.4m falling due after that. Offsetting this, it had US$765.9m in cash and US$163.8m in receivables that were due within 12 months. So it can boast US$258.4m 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. Simply put, the fact that Neurocrine Biosciences has more cash than debt is arguably a good indication that it can manage its debt safely.
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. There's no doubt that we learn most about debt from the balance sheet. 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 company can only pay off debt with cold hard cash, not accounting profits. 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 last three years, Neurocrine Biosciences recorded free cash flow worth a fulsome 87% of its EBIT, which is stronger than we'd usually expect. That positions it well to pay down debt if desirable to do so.
While we empathize with investors who find debt concerning, you should keep in mind that Neurocrine Biosciences has net cash of US$435.2m, as well as more liquid assets than liabilities. The cherry on top was that in converted 87% of that EBIT to free cash flow, bringing in US$328m. So we are not troubled with Neurocrine Biosciences's debt use. 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 instance, we've identified 1 warning sign for Neurocrine Biosciences that you should be aware of.
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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