We Think United Therapeutics (NASDAQ:UTHR) 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 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. We can see that United Therapeutics Corporation (NASDAQ:UTHR) does use debt in its business. But the real question is whether this debt is making the company risky.

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. 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. Of course, debt can be an important tool in businesses, particularly capital heavy businesses. The first step when considering a company's debt levels is to consider its cash and debt together.

View our latest analysis for United Therapeutics

What Is United Therapeutics's Net Debt?

As you can see below, United Therapeutics had US$800.0m of debt, at September 2022, which is about the same as the year before. You can click the chart for greater detail. However, it does have US$2.62b in cash offsetting this, leading to net cash of US$1.82b.

How Healthy Is United Therapeutics' Balance Sheet?

The latest balance sheet data shows that United Therapeutics had liabilities of US$315.9m due within a year, and liabilities of US$903.5m falling due after that. On the other hand, it had cash of US$2.62b and US$231.7m worth of receivables due within a year. So it actually has US$1.63b more liquid assets than total liabilities.

This short term liquidity is a sign that United Therapeutics could probably pay off its debt with ease, as its balance sheet is far from stretched. Succinctly put, United Therapeutics boasts net cash, so it's fair to say it does not have a heavy debt load!

In addition to that, we're happy to report that United Therapeutics has boosted its EBIT by 68%, thus reducing the spectre of future debt repayments. The balance sheet is clearly the area to focus on when you are analysing debt. But it is future earnings, more than anything, that will determine United Therapeutics'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. United Therapeutics 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, United Therapeutics recorded free cash flow worth a fulsome 84% of its EBIT, which is stronger than we'd usually expect. That puts it in a very strong position to pay down debt.

Summing Up

While it is always sensible to investigate a company's debt, in this case United Therapeutics has US$1.82b in net cash and a decent-looking balance sheet. And it impressed us with free cash flow of US$679m, being 84% of its EBIT. So we don't think United Therapeutics's use of debt is risky. When analysing debt levels, the balance sheet is the obvious place to start. But ultimately, every company can contain risks that exist outside of the balance sheet. To that end, you should be aware of the 1 warning sign we've spotted with United Therapeutics .

Of course, if you're the type of investor who prefers buying stocks without the burden of debt, then don't hesitate to discover our exclusive list of net cash growth stocks, today.

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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.