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.' When we think about how risky a company is, we always like to look at its use of debt, since debt overload can lead to ruin. We can see that Regeneron Pharmaceuticals, Inc. (NASDAQ:REGN) does use debt in its business. But is this debt a concern to shareholders?
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 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. Of course, the upside of debt is that it often represents cheap capital, especially when it replaces dilution in a company with the ability to reinvest at high rates of return. The first thing to do when considering how much debt a business uses is to look at its cash and debt together.
What Is Regeneron Pharmaceuticals's Debt?
The chart below, which you can click on for greater detail, shows that Regeneron Pharmaceuticals had US$1.98b in debt in September 2021; about the same as the year before. However, it does have US$5.79b in cash offsetting this, leading to net cash of US$3.81b.
How Healthy Is Regeneron Pharmaceuticals' Balance Sheet?
We can see from the most recent balance sheet that Regeneron Pharmaceuticals had liabilities of US$3.71b falling due within a year, and liabilities of US$2.70b due beyond that. Offsetting this, it had US$5.79b in cash and US$5.45b in receivables that were due within 12 months. So it can boast US$4.83b 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. Succinctly put, Regeneron Pharmaceuticals boasts net cash, so it's fair to say it does not have a heavy debt load!
Even more impressive was the fact that Regeneron Pharmaceuticals grew its EBIT by 130% over twelve months. 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 ultimately the future profitability of the business will decide if Regeneron Pharmaceuticals 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.
But our final consideration is also important, because a company cannot pay debt with paper profits; it needs cold hard cash. While Regeneron Pharmaceuticals 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. During the last three years, Regeneron Pharmaceuticals produced sturdy free cash flow equating to 71% of its EBIT, about what we'd expect. This free cash flow puts the company in a good position to pay down debt, when appropriate.
While we empathize with investors who find debt concerning, you should keep in mind that Regeneron Pharmaceuticals has net cash of US$3.81b, as well as more liquid assets than liabilities. And it impressed us with its EBIT growth of 130% 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 is significant) we think you should know about.
If, after all that, you're more interested in a fast growing company with a rock-solid balance sheet, then check out our list of net cash growth stocks without delay.
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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.