We Think Supernus Pharmaceuticals (NASDAQ:SUPN) Can Stay On Top Of Its Debt

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 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. Importantly, Supernus Pharmaceuticals, Inc. (NASDAQ:SUPN) does carry debt. But the real question is whether this debt is making the company risky.

When Is Debt Dangerous?

Debt is a tool to help businesses grow, but if a business is incapable of paying off its lenders, then it exists at their mercy. If things get really bad, the lenders can take control of the business. However, a more common (but still painful) scenario is that it has to raise new equity capital at a low price, thus permanently diluting shareholders. 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. When we think about a company's use of debt, we first look at cash and debt together.

See our latest analysis for Supernus Pharmaceuticals

What Is Supernus Pharmaceuticals's Net Debt?

The image below, which you can click on for greater detail, shows that at December 2022 Supernus Pharmaceuticals had debt of US$402.0m, up from US$379.3m in one year. However, it does have US$461.3m in cash offsetting this, leading to net cash of US$59.4m.

A Look At Supernus Pharmaceuticals' Liabilities

The latest balance sheet data shows that Supernus Pharmaceuticals had liabilities of US$688.0m due within a year, and liabilities of US$128.3m falling due after that. Offsetting these obligations, it had cash of US$461.3m as well as receivables valued at US$165.5m due within 12 months. So it has liabilities totalling US$189.5m more than its cash and near-term receivables, combined.

Of course, Supernus Pharmaceuticals has a market capitalization of US$1.97b, so these liabilities are probably manageable. 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.

The modesty of its debt load may become crucial for Supernus Pharmaceuticals if management cannot prevent a repeat of the 43% cut to EBIT over the last year. When a company sees its earnings tank, it can sometimes find its relationships with its lenders turn sour. When analysing debt levels, the balance sheet is the obvious place to start. 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, a company can only pay off debt with cold hard cash, not accounting profits. While Supernus 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. Happily for any shareholders, Supernus Pharmaceuticals actually produced more free cash flow than EBIT over the last three years. That sort of strong cash generation warms our hearts like a puppy in a bumblebee suit.

Summing Up

While it is always sensible to look at a company's total liabilities, it is very reassuring that Supernus Pharmaceuticals has US$59.4m in net cash. The cherry on top was that in converted 125% of that EBIT to free cash flow, bringing in US$116m. So we are not troubled with Supernus Pharmaceuticals's debt use. 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 instance, we've identified 2 warning signs for Supernus Pharmaceuticals that you should be aware of.

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.

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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.