We Think Regeneron Pharmaceuticals (NASDAQ:REGN) Can Manage Its Debt With Ease

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.' 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. We note that Regeneron Pharmaceuticals, Inc. (NASDAQ:REGN) does have debt on its balance sheet. But the more important question is: how much risk is that debt creating?

When Is Debt A Problem?

Debt assists a business until the business has trouble paying it off, either with new capital or with free cash flow. 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. 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.

See our latest analysis for Regeneron Pharmaceuticals

What Is Regeneron Pharmaceuticals's Net Debt?

The chart below, which you can click on for greater detail, shows that Regeneron Pharmaceuticals had US$1.98b in debt in December 2021; about the same as the year before. But it also has US$5.69b in cash to offset that, meaning it has US$3.71b net cash.

A Look At Regeneron Pharmaceuticals' Liabilities

Zooming in on the latest balance sheet data, we can see that Regeneron Pharmaceuticals had liabilities of US$3.93b due within 12 months and liabilities of US$2.73b due beyond that. Offsetting this, it had US$5.69b in cash and US$6.04b in receivables that were due within 12 months. So it actually has US$5.07b 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.

Even more impressive was the fact that Regeneron Pharmaceuticals grew its EBIT by 150% over twelve months. If maintained that growth will make the debt even more manageable in the years ahead. 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 Regeneron Pharmaceuticals'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 business needs free cash flow to pay off debt; accounting profits just don't cut it. 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. Over the most recent three years, Regeneron Pharmaceuticals recorded free cash flow worth 71% 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$3.71b, as well as more liquid assets than liabilities. And it impressed us with its EBIT growth of 150% over the last year. 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, we've discovered 3 warning signs for Regeneron Pharmaceuticals (1 can't be ignored!) 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.