Is Supernus Pharmaceuticals (NASDAQ:SUPN) Using Too Much Debt?

Warren Buffett famously said, 'Volatility is far from synonymous with risk.' 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 Supernus Pharmaceuticals, Inc. (NASDAQ:SUPN) makes use of debt. But is this debt a concern to shareholders?

What Risk Does Debt Bring?

Debt assists a business until the business has trouble paying it off, either with new capital or with free cash flow. Ultimately, if the company can't fulfill its legal obligations to repay debt, shareholders could walk away with nothing. 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.

Check out our latest analysis for Supernus Pharmaceuticals

What Is Supernus Pharmaceuticals's Net Debt?

You can click the graphic below for the historical numbers, but it shows that as of June 2021 Supernus Pharmaceuticals had US$370.4m of debt, an increase on US$353.3m, over one year. However, its balance sheet shows it holds US$409.8m in cash, so it actually has US$39.5m net cash.

How Healthy Is Supernus Pharmaceuticals' Balance Sheet?

Zooming in on the latest balance sheet data, we can see that Supernus Pharmaceuticals had liabilities of US$283.4m due within 12 months and liabilities of US$504.0m due beyond that. Offsetting this, it had US$409.8m in cash and US$137.3m in receivables that were due within 12 months. So its liabilities total US$240.4m more than the combination of its cash and short-term receivables.

Since publicly traded Supernus Pharmaceuticals shares are worth a total of US$1.63b, it seems unlikely that this level of liabilities would be a major threat. But there are sufficient liabilities that we would certainly recommend shareholders continue to monitor the balance sheet, going forward. While it does have liabilities worth noting, Supernus Pharmaceuticals also has more cash than debt, so we're pretty confident it can manage its debt safely.

On the other hand, Supernus Pharmaceuticals saw its EBIT drop by 2.3% in the last twelve months. That sort of decline, if sustained, will obviously make debt harder to handle. There's no doubt that we learn most about debt from the balance sheet. But ultimately the future profitability of the business will decide if Supernus Pharmaceuticals can strengthen its balance sheet over time. So if you're focused on the future you can check out this free report showing analyst profit forecasts.

Finally, while the tax-man may adore accounting profits, lenders only accept cold hard cash. Supernus 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, Supernus Pharmaceuticals recorded free cash flow worth a fulsome 96% 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

Although Supernus Pharmaceuticals's balance sheet isn't particularly strong, due to the total liabilities, it is clearly positive to see that it has net cash of US$39.5m. The cherry on top was that in converted 96% of that EBIT to free cash flow, bringing in US$118m. So we don't have any problem with Supernus Pharmaceuticals's use of debt. The balance sheet is clearly the area to focus on when you are analysing debt. However, not all investment risk resides within the balance sheet - far from it. To that end, you should be aware of the 2 warning signs we've spotted with Supernus Pharmaceuticals .

When all is said and done, sometimes its easier to focus on companies that don't even need debt. Readers can access a list of growth stocks with zero net debt 100% free, right now.

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.

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