Nasdaq Today – Regeneron Pharmaceuticals (NASDAQ:REGN) Seems To Use Debt Rather Sparingly
The external fund manager backed by Berkshire Hathaway’s Charlie Munger, Li Lu, makes no bones about it when he says ‘The biggest investment risk is not the volatility of prices, but whether you will suffer a permanent loss of capital.’ 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 can see that Regeneron Pharmaceuticals, Inc. (NASDAQ:REGN) does use debt in its business. But the more important question is: how much risk is that debt creating?
What Risk Does Debt Bring?
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. Ultimately, if the company can’t fulfill its legal obligations to repay debt, shareholders could walk away with nothing. 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. Having said that, the most common situation is where a company manages its debt reasonably well – and to its own advantage. The first thing to do when considering how much debt a business uses is to look at its cash and debt together.
Check out our latest analysis for Regeneron Pharmaceuticals
What Is Regeneron Pharmaceuticals’s Net Debt?
The image below, which you can click on for greater detail, shows that at December 2020 Regeneron Pharmaceuticals had debt of US$1.98b, up from none in one year. However, it does have US$3.59b in cash offsetting this, leading to net cash of US$1.61b.
How Healthy Is Regeneron Pharmaceuticals’ Balance Sheet?
Zooming in on the latest balance sheet data, we can see that Regeneron Pharmaceuticals had liabilities of US$2.70b due within 12 months and liabilities of US$3.44b due beyond that. On the other hand, it had cash of US$3.59b and US$4.11b worth of receivables due within a year. So it can boast US$1.56b more liquid assets than total liabilities.
This surplus suggests that Regeneron Pharmaceuticals has a conservative balance sheet, and could probably eliminate its debt without much difficulty. Simply put, the fact that Regeneron Pharmaceuticals has more cash than debt is arguably a good indication that it can manage its debt safely.
In addition to that, we’re happy to report that Regeneron Pharmaceuticals has boosted its EBIT by 47%, 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 Regeneron 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. While Regeneron Pharmaceuticals has net cash on its balance sheet, it’s still worth taking a look at its ability to convert earnings before interest and tax (EBIT) to free cash flow, to help us understand how quickly it is building (or eroding) that cash balance. 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 cold hard cash means it can reduce its debt when it wants to.
While we empathize with investors who find debt concerning, you should keep in mind that Regeneron Pharmaceuticals has net cash of US$1.61b, as well as more liquid assets than liabilities. And it impressed us with its EBIT growth of 47% over the last year. So we don’t think Regeneron Pharmaceuticals’s use of debt is risky. Another factor that would give us confidence in Regeneron Pharmaceuticals would be if insiders have been buying shares: if you’re conscious of that signal too, you can find out instantly by clicking this link.
When all is said and done, sometimes its easier to focus on companies that don’t even need debt. Readers can access a list of growth stocks with zero net debt 100% free, right now.
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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