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.' 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 BioMarin Pharmaceutical Inc. (NASDAQ:BMRN) does use debt in its business. But the real question is whether this debt is making the company risky.

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. 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, debt can be an important tool in businesses, particularly capital heavy businesses. The first thing to do when considering how much debt a business uses is to look at its cash and debt together.

What Is BioMarin Pharmaceutical's Net Debt?

The image below, which you can click on for greater detail, shows that BioMarin Pharmaceutical had debt of US$594.6m at the end of September 2024, a reduction from US$1.09b over a year. However, its balance sheet shows it holds US$930.4m in cash, so it actually has US$335.8m net cash.

How Strong Is BioMarin Pharmaceutical's Balance Sheet?

Zooming in on the latest balance sheet data, we can see that BioMarin Pharmaceutical had liabilities of US$715.7m due within 12 months and liabilities of US$722.1m due beyond that. Offsetting these obligations, it had cash of US$930.4m as well as receivables valued at US$777.5m due within 12 months. So it can boast US$270.2m more liquid assets than total liabilities.

This surplus suggests that BioMarin Pharmaceutical has a conservative balance sheet, and could probably eliminate its debt without much difficulty. Simply put, the fact that BioMarin Pharmaceutical has more cash than debt is arguably a good indication that it can manage its debt safely.

Better yet, BioMarin Pharmaceutical grew its EBIT by 107% last year, which is an impressive improvement. If maintained that growth will make the debt even more manageable in the years ahead. When analysing debt levels, the balance sheet is the obvious place to start. But ultimately the future profitability of the business will decide if BioMarin Pharmaceutical 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, a business needs free cash flow to pay off debt; accounting profits just don't cut it. While BioMarin Pharmaceutical 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. During the last three years, BioMarin Pharmaceutical generated free cash flow amounting to a very robust 99% of its EBIT, more than we'd expect. That puts it in a very strong position to pay down debt.

Summing Up

While it is always sensible to investigate a company's debt, in this case BioMarin Pharmaceutical has US$335.8m in net cash and a decent-looking balance sheet. The cherry on top was that in converted 99% of that EBIT to free cash flow, bringing in US$311m. So is BioMarin Pharmaceutical's debt a risk? It doesn't seem so to us. We'd be very excited to see if BioMarin Pharmaceutical insiders have been snapping up shares. If you are too, then click on this link right now to take a (free) peek at our list of reported insider transactions.

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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