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.' 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. We note that BioMarin Pharmaceutical Inc. (NASDAQ:BMRN) does have debt on its balance sheet. But is this debt a concern to shareholders?
When Is Debt Dangerous?
Debt assists a business until the business has trouble paying it off, either with new capital or with free cash flow. Part and parcel of capitalism is the process of 'creative destruction' where failed businesses are mercilessly liquidated by their bankers. However, a more usual (but still expensive) situation is where a company must dilute shareholders at a cheap share price simply to get debt under control. Of course, plenty of companies use debt to fund growth, without any negative consequences. The first step when considering a company's debt levels is to consider its cash and debt together.
What Is BioMarin Pharmaceutical's Debt?
As you can see below, BioMarin Pharmaceutical had US$1.08b of debt, at June 2022, which is about the same as the year before. You can click the chart for greater detail. But it also has US$1.11b in cash to offset that, meaning it has US$28.7m net cash.
A Look At BioMarin Pharmaceutical's Liabilities
Zooming in on the latest balance sheet data, we can see that BioMarin Pharmaceutical had liabilities of US$464.7m due within 12 months and liabilities of US$1.18b due beyond that. On the other hand, it had cash of US$1.11b and US$466.5m worth of receivables due within a year. So it has liabilities totalling US$64.8m more than its cash and near-term receivables, combined.
This state of affairs indicates that BioMarin Pharmaceutical's balance sheet looks quite solid, as its total liabilities are just about equal to its liquid assets. So while it's hard to imagine that the US$16.1b company is struggling for cash, we still think it's worth monitoring its balance sheet. Despite its noteworthy liabilities, BioMarin Pharmaceutical boasts net cash, so it's fair to say it does not have a heavy debt load! 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 BioMarin Pharmaceutical'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.
Over 12 months, BioMarin Pharmaceutical saw its revenue hold pretty steady, and it did not report positive earnings before interest and tax. While that hardly impresses, its not too bad either.
So How Risky Is BioMarin Pharmaceutical?
Although BioMarin Pharmaceutical had an earnings before interest and tax (EBIT) loss over the last twelve months, it made a statutory profit of US$54m. So when you consider it has net cash, along with the statutory profit, the stock probably isn't as risky as it might seem, at least in the short term. With revenue growth uninspiring, we'd really need to see some positive EBIT before mustering much enthusiasm for this business. 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. Case in point: We've spotted 3 warning signs for BioMarin Pharmaceutical you should be aware of.
At the end of the day, it's often better to focus on companies that are free from net debt. You can access our special list of such companies (all with a track record of profit growth). It's free.
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