These 4 Measures Indicate That Regeneron Pharmaceuticals (NASDAQ:REGN) Is Using Debt Reasonably Well

David Iben put it well when he said, 'Volatility is not a risk we care about. What we care about is avoiding the permanent loss of capital.' 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. As with many other companies Regeneron Pharmaceuticals, Inc. (NASDAQ:REGN) makes use of debt. But should shareholders be worried about its use of debt?

When Is Debt Dangerous?

Generally speaking, debt only becomes a real problem when a company can't easily pay it off, either by raising capital or with its own cash flow. 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, plenty of companies use debt to fund growth, without any negative consequences. The first step when considering a company's debt levels is to consider its cash and debt together.

Check out our latest analysis for Regeneron Pharmaceuticals

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 March 2024; about the same as the year before. But it also has US$10.5b in cash to offset that, meaning it has US$8.54b net cash.

How Strong Is Regeneron Pharmaceuticals' Balance Sheet?

The latest balance sheet data shows that Regeneron Pharmaceuticals had liabilities of US$3.58b due within a year, and liabilities of US$3.80b falling due after that. Offsetting this, it had US$10.5b in cash and US$5.22b in receivables that were due within 12 months. So it actually has US$8.36b 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!

On the other hand, Regeneron Pharmaceuticals's EBIT dived 15%, over the last year. If that rate of decline in earnings continues, the company could find itself in a tight spot. The balance sheet is clearly the area to focus on when you are analysing debt. 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. 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 last three years, Regeneron Pharmaceuticals recorded free cash flow worth a fulsome 81% of its EBIT, which is stronger than we'd usually 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 Regeneron Pharmaceuticals has US$8.54b in net cash and a decent-looking balance sheet. The cherry on top was that in converted 81% of that EBIT to free cash flow, bringing in US$3.9b. So we don't think Regeneron Pharmaceuticals's use of debt is risky. There's no doubt that we learn most about debt from the balance sheet. But ultimately, every company can contain risks that exist outside of the balance sheet. For example - Regeneron Pharmaceuticals has 1 warning sign we think 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.

Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team (at) simplywallst.com.

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.