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. As with many other companies Regeneron Pharmaceuticals, Inc. (NASDAQ:REGN) makes use of debt. But the more important question is: how much risk is that debt creating?
What Risk Does Debt Bring?
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. In the worst case scenario, a company can go bankrupt if it cannot pay its creditors. 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. 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.
What Is Regeneron Pharmaceuticals's Debt?
The chart below, which you can click on for greater detail, shows that Regeneron Pharmaceuticals had US$1.98b in debt in June 2022; about the same as the year before. But on the other hand it also has US$7.57b in cash, leading to a US$5.59b net cash position.
How Strong Is Regeneron Pharmaceuticals' Balance Sheet?
Zooming in on the latest balance sheet data, we can see that Regeneron Pharmaceuticals had liabilities of US$3.03b due within 12 months and liabilities of US$3.48b due beyond that. On the other hand, it had cash of US$7.57b and US$5.16b worth of receivables due within a year. So it can boast US$6.21b more liquid assets than total liabilities.
This short term liquidity is a sign that Regeneron Pharmaceuticals could probably pay off its debt with ease, as its balance sheet is far from stretched. Succinctly put, Regeneron Pharmaceuticals boasts net cash, so it's fair to say it does not have a heavy debt load!
Fortunately, Regeneron Pharmaceuticals grew its EBIT by 6.0% in the last year, making that debt load look even more manageable. When analysing debt levels, the balance sheet is the obvious place to start. But ultimately the future profitability of the business will decide if Regeneron Pharmaceuticals can strengthen its balance sheet over time. So if you're focused on the future you can check out this free report showing analyst profit forecasts.
Finally, while the tax-man may adore accounting profits, lenders only accept cold hard cash. Regeneron 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 most recent three years, Regeneron Pharmaceuticals recorded free cash flow worth 72% of its EBIT, which is around normal, given free cash flow excludes interest and tax. This free cash flow puts the company in a good position to pay down debt, when appropriate.
Summing Up
While we empathize with investors who find debt concerning, you should keep in mind that Regeneron Pharmaceuticals has net cash of US$5.59b, as well as more liquid assets than liabilities. The cherry on top was that in converted 72% of that EBIT to free cash flow, bringing in US$7.9b. So is Regeneron 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. However, not all investment risk resides within the balance sheet - far from it. To that end, you should be aware of the 2 warning signs we've spotted with Regeneron Pharmaceuticals .
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.
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