Does Supernus Pharmaceuticals (NASDAQ:SUPN) Have A Healthy Balance Sheet?

Legendary fund manager Li Lu (who Charlie Munger backed) once said, 'The biggest investment risk is not the volatility of prices, but whether you will suffer a permanent loss of capital.' 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. We can see that Supernus Pharmaceuticals, Inc. (NASDAQ:SUPN) does use debt in its business. But the more important question is: how much risk is that debt creating?

When Is Debt A Problem?

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. Part and parcel of capitalism is the process of 'creative destruction' where failed businesses are mercilessly liquidated by their bankers. 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. Having said that, the most common situation is where a company manages its debt reasonably well - and to its own advantage. When we examine debt levels, we first consider both cash and debt levels, together.

View our latest analysis for Supernus Pharmaceuticals

How Much Debt Does Supernus Pharmaceuticals Carry?

You can click the graphic below for the historical numbers, but it shows that as of September 2020 Supernus Pharmaceuticals had US$357.5m of debt, an increase on US$341.2m, over one year. However, it does have US$352.0m in cash offsetting this, leading to net debt of about US$5.57m.

A Look At Supernus Pharmaceuticals's Liabilities

Zooming in on the latest balance sheet data, we can see that Supernus Pharmaceuticals had liabilities of US$299.6m due within 12 months and liabilities of US$501.5m due beyond that. Offsetting these obligations, it had cash of US$352.0m as well as receivables valued at US$133.1m due within 12 months. So its liabilities outweigh the sum of its cash and (near-term) receivables by US$316.1m.

While this might seem like a lot, it is not so bad since Supernus Pharmaceuticals has a market capitalization of US$1.19b, and so it could probably strengthen its balance sheet by raising capital if it needed to. But we definitely want to keep our eyes open to indications that its debt is bringing too much risk. But either way, Supernus Pharmaceuticals has virtually no net debt, so it's fair to say it does not have a heavy debt load!

In order to size up a company's debt relative to its earnings, we calculate its net debt divided by its earnings before interest, tax, depreciation, and amortization (EBITDA) and its earnings before interest and tax (EBIT) divided by its interest expense (its interest cover). The advantage of this approach is that we take into account both the absolute quantum of debt (with net debt to EBITDA) and the actual interest expenses associated with that debt (with its interest cover ratio).

Supernus Pharmaceuticals has very little debt (net of cash), and boasts a debt to EBITDA ratio of 0.029 and EBIT of 39.1 times the interest expense. Indeed relative to its earnings its debt load seems light as a feather. The good news is that Supernus Pharmaceuticals has increased its EBIT by 9.6% over twelve months, which should ease any concerns about debt repayment. 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 Supernus 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, while the tax-man may adore accounting profits, lenders only accept cold hard cash. So it's worth checking how much of that EBIT is backed by free cash flow. Over the last three years, Supernus Pharmaceuticals recorded free cash flow worth a fulsome 85% of its EBIT, which is stronger than we'd usually expect. That puts it in a very strong position to pay down debt.

Our View

Supernus Pharmaceuticals's interest cover suggests it can handle its debt as easily as Cristiano Ronaldo could score a goal against an under 14's goalkeeper. And that's just the beginning of the good news since its conversion of EBIT to free cash flow is also very heartening. Zooming out, Supernus Pharmaceuticals seems to use debt quite reasonably; and that gets the nod from us. While debt does bring risk, when used wisely it can also bring a higher return on equity. There's no doubt that we learn most about debt from the balance sheet. However, not all investment risk resides within the balance sheet - far from it. For example, we've discovered 2 warning signs for Supernus Pharmaceuticals (1 is a bit unpleasant!) 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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