Is Regeneron Pharmaceuticals (NASDAQ:REGN) A Risky Investment?

Howard Marks put it nicely when he said that, rather than worrying about share price volatility, 'The possibility of permanent loss is the risk I worry about... and every practical investor I know worries about.' So it might be obvious that you need to consider debt, when you think about how risky any given stock is, because too much debt can sink a company. Importantly, Regeneron Pharmaceuticals, Inc. (NASDAQ:REGN) does carry debt. But should shareholders be worried about its use of debt?

What Risk Does Debt Bring?

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. If things get really bad, the lenders can take control of the business. 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. Of course, plenty of companies use debt to fund growth, without any negative consequences. When we examine debt levels, we first consider both cash and debt levels, together.

View our latest analysis for Regeneron Pharmaceuticals

What Is Regeneron Pharmaceuticals's Net Debt?

As you can see below, Regeneron Pharmaceuticals had US$1.98b of debt, at March 2022, which is about the same as the year before. You can click the chart for greater detail. But on the other hand it also has US$7.05b in cash, leading to a US$5.07b net cash position.

A Look At Regeneron Pharmaceuticals' Liabilities

The latest balance sheet data shows that Regeneron Pharmaceuticals had liabilities of US$3.01b due within a year, and liabilities of US$3.43b falling due after that. Offsetting these obligations, it had cash of US$7.05b as well as receivables valued at US$4.84b due within 12 months. So it actually has US$5.46b more liquid assets than total liabilities.

This short term liquidity is a sign that Regeneron Pharmaceuticals could probably pay off its debt with ease, as its balance sheet is far from stretched. Simply put, the fact that Regeneron Pharmaceuticals has more cash than debt is arguably a good indication that it can manage its debt safely.

Better yet, Regeneron Pharmaceuticals grew its EBIT by 129% last year, which is an impressive improvement. If maintained that growth will make the debt even more manageable in the years ahead. When analysing debt levels, the balance sheet is the obvious place to start. But it is future earnings, more than anything, that will determine Regeneron Pharmaceuticals's ability to maintain a healthy balance sheet going forward. So if you're focused on the future you can check out this free report showing analyst profit forecasts.

Finally, a company can only pay off debt with cold hard cash, not accounting profits. Regeneron Pharmaceuticals 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 most recent three years, Regeneron Pharmaceuticals recorded free cash flow worth 75% of its EBIT, which is around normal, given free cash flow excludes interest and tax. This cold hard cash means it can reduce its debt when it wants to.

Summing up

While we empathize with investors who find debt concerning, you should keep in mind that Regeneron Pharmaceuticals has net cash of US$5.07b, as well as more liquid assets than liabilities. And it impressed us with its EBIT growth of 129% over the last year. So is Regeneron Pharmaceuticals'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 Regeneron Pharmaceuticals has 2 warning signs (and 1 which doesn't sit too well with us) we think you should know about.

Of course, if you're the type of investor who prefers buying stocks without the burden of debt, then don't hesitate to discover our exclusive list of net cash growth stocks, today.

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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.