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Warren Buffett famously said, '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 can see that Neurocrine Biosciences, Inc. (NASDAQ:NBIX) does use debt in its business. But should shareholders be worried about its use of debt?
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. Part and parcel of capitalism is the process of 'creative destruction' where failed businesses are mercilessly liquidated by their bankers. 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, plenty of companies use debt to fund growth, without any negative consequences. When we examine debt levels, we first consider both cash and debt levels, together.
What Is Neurocrine Biosciences's Net Debt?
The image below, which you can click on for greater detail, shows that Neurocrine Biosciences had debt of US$326.3m at the end of June 2021, a reduction from US$419.5m over a year. But it also has US$884.9m in cash to offset that, meaning it has US$558.6m net cash.
How Healthy Is Neurocrine Biosciences' Balance Sheet?
According to the last reported balance sheet, Neurocrine Biosciences had liabilities of US$212.9m due within 12 months, and liabilities of US$464.3m due beyond 12 months. Offsetting this, it had US$884.9m in cash and US$158.5m in receivables that were due within 12 months. So it can boast US$366.2m more liquid assets than total liabilities.
This short term liquidity is a sign that Neurocrine Biosciences could probably pay off its debt with ease, as its balance sheet is far from stretched. Simply put, the fact that Neurocrine Biosciences has more cash than debt is arguably a good indication that it can manage its debt safely.
The modesty of its debt load may become crucial for Neurocrine Biosciences if management cannot prevent a repeat of the 31% 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. 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 Neurocrine Biosciences's ability to maintain a healthy balance sheet going forward. So if you're focused on the future you can check out this free report showing analyst profit forecasts.
Finally, a company can only pay off debt with cold hard cash, not accounting profits. Neurocrine Biosciences 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. During the last three years, Neurocrine Biosciences generated free cash flow amounting to a very robust 86% of its EBIT, more than we'd expect. That positions it well to pay down debt if desirable to do so.
While we empathize with investors who find debt concerning, you should keep in mind that Neurocrine Biosciences has net cash of US$558.6m, as well as more liquid assets than liabilities. And it impressed us with free cash flow of US$251m, being 86% of its EBIT. So we don't have any problem with Neurocrine Biosciences's use of debt. 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. We've identified 1 warning sign with Neurocrine Biosciences , and understanding them should be part of your investment process.
If, after all that, you're more interested in a fast growing company with a rock-solid balance sheet, then check out our list of net cash growth stocks without delay.
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.
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