Warren Buffett famously said, 'Volatility is far from synonymous with risk.' When we think about how risky a company is, we always like to look at its use of debt, since debt overload can lead to ruin. We note that United Therapeutics Corporation (NASDAQ:UTHR) does have debt on its balance sheet. But the real question is whether this debt is making the company risky.

Why Does Debt Bring Risk?

Debt is a tool to help businesses grow, but if a business is incapable of paying off its lenders, then it exists at their mercy. If things get really bad, the lenders can take control of the business. 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. Of course, plenty of companies use debt to fund growth, without any negative consequences. When we examine debt levels, we first consider both cash and debt levels, together.

What Is United Therapeutics's Debt?

The image below, which you can click on for greater detail, shows that United Therapeutics had debt of US$600.0m at the end of March 2024, a reduction from US$800.0m over a year. However, it does have US$2.71b in cash offsetting this, leading to net cash of US$2.11b.

How Healthy Is United Therapeutics' Balance Sheet?

We can see from the most recent balance sheet that United Therapeutics had liabilities of US$860.6m falling due within a year, and liabilities of US$296.5m due beyond that. Offsetting these obligations, it had cash of US$2.71b as well as receivables valued at US$307.3m due within 12 months. So it can boast US$1.86b more liquid assets than total liabilities.

This surplus suggests that United Therapeutics has a conservative balance sheet, and could probably eliminate its debt without much difficulty. Succinctly put, United Therapeutics boasts net cash, so it's fair to say it does not have a heavy debt load!

Another good sign is that United Therapeutics has been able to increase its EBIT by 28% in twelve months, making it easier to pay down debt. The balance sheet is clearly the area to focus on when you are analysing debt. But ultimately the future profitability of the business will decide if United Therapeutics 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. While United Therapeutics 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, United Therapeutics recorded free cash flow worth 68% 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 United Therapeutics has net cash of US$2.11b, as well as more liquid assets than liabilities. And we liked the look of last year's 28% year-on-year EBIT growth. So is United Therapeutics's debt a risk? It doesn't seem so to us. We'd be very excited to see if United Therapeutics 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 you're interested in investing in businesses that can grow profits without the burden of debt, then check out this free list of growing businesses that have net cash on the balance sheet.

Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team (at) simplywallst.com.
This article by Simply Wall St is general in nature. We provide commentary based on historical data and analyst forecasts only using an unbiased methodology and our articles are not intended to be financial advice. 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.

Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team@simplywallst.com