Yahoo Finance Jazz Pharmaceuticals (NASDAQ:JAZZ) Has A Rock Solid Balance Sheet
Warren Buffett famously said, 'Volatility is far from synonymous with risk.' 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. Importantly, Jazz Pharmaceuticals plc (NASDAQ:JAZZ) does carry debt. But the real question is whether this debt is making the company risky.
When Is Debt A Problem?
Debt and other liabilities become risky for a business when it cannot easily fulfill those obligations, either with free cash flow or by raising capital at an attractive price. Part and parcel of capitalism is the process of 'creative destruction' where failed businesses are mercilessly liquidated by their bankers. 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. By replacing dilution, though, debt can be an extremely good tool for businesses that need capital to invest in growth at high rates of return. When we examine debt levels, we first consider both cash and debt levels, together.
View our latest analysis for Jazz Pharmaceuticals
What Is Jazz Pharmaceuticals's Debt?
The image below, which you can click on for greater detail, shows that at December 2020 Jazz Pharmaceuticals had debt of US$2.10b, up from US$1.61b in one year. However, its balance sheet shows it holds US$2.13b in cash, so it actually has US$35.1m net cash.
A Look At Jazz Pharmaceuticals' Liabilities
We can see from the most recent balance sheet that Jazz Pharmaceuticals had liabilities of US$653.7m falling due within a year, and liabilities of US$2.22b due beyond that. Offsetting these obligations, it had cash of US$2.13b as well as receivables valued at US$396.5m due within 12 months. So its liabilities outweigh the sum of its cash and (near-term) receivables by US$346.9m.
Since publicly traded Jazz Pharmaceuticals shares are worth a total of US$9.37b, it seems unlikely that this level of liabilities would be a major threat. Having said that, it's clear that we should continue to monitor its balance sheet, lest it change for the worse. While it does have liabilities worth noting, Jazz Pharmaceuticals also has more cash than debt, so we're pretty confident it can manage its debt safely.
Also good is that Jazz Pharmaceuticals grew its EBIT at 19% over the last year, further increasing its ability to manage debt. When analysing debt levels, the balance sheet is the obvious place to start. But it is future earnings, more than anything, that will determine Jazz 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. Jazz 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, Jazz Pharmaceuticals 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
We could understand if investors are concerned about Jazz Pharmaceuticals's liabilities, but we can be reassured by the fact it has has net cash of US$35.1m. The cherry on top was that in converted 84% of that EBIT to free cash flow, bringing in US$520m. So is Jazz Pharmaceuticals's debt a risk? It doesn't seem so to us. There's no doubt that we learn most about debt from the balance sheet. But ultimately, every company can contain risks that exist outside of the balance sheet. Be aware that Jazz Pharmaceuticals is showing 4 warning signs in our investment analysis , you should know about...
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. 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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