Howard Marks put it nicely when he said that, rather than worrying about share price volatility, 'The possibility of permanent loss is the risk I worry about... and every practical investor I know worries about.' 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. Importantly, Legend Biotech Corporation (NASDAQ:LEGN) does carry debt. But is this debt a concern to shareholders?
What Risk Does Debt Bring?
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. Ultimately, if the company can't fulfill its legal obligations to repay debt, shareholders could walk away with nothing. 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. Having said that, the most common situation is where a company manages its debt reasonably well - and to its own advantage. The first step when considering a company's debt levels is to consider its cash and debt together.
What Is Legend Biotech's Net Debt?
As you can see below, at the end of March 2024, Legend Biotech had US$286.4m of debt, up from US$265.9m a year ago. Click the image for more detail. But on the other hand it also has US$1.30b in cash, leading to a US$1.02b net cash position.
How Strong Is Legend Biotech's Balance Sheet?
We can see from the most recent balance sheet that Legend Biotech had liabilities of US$249.7m falling due within a year, and liabilities of US$361.4m due beyond that. On the other hand, it had cash of US$1.30b and US$78.0m worth of receivables due within a year. So it can boast US$769.3m more liquid assets than total liabilities.
This surplus suggests that Legend Biotech has a conservative balance sheet, and could probably eliminate its debt without much difficulty. Succinctly put, Legend Biotech 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 ultimately the future profitability of the business will decide if Legend Biotech can strengthen its balance sheet over time. 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, Legend Biotech reported revenue of US$343m, which is a gain of 206%, although it did not report any earnings before interest and tax. That's virtually the hole-in-one of revenue growth!
So How Risky Is Legend Biotech?
Statistically speaking companies that lose money are riskier than those that make money. And in the last year Legend Biotech had an earnings before interest and tax (EBIT) loss, truth be told. And over the same period it saw negative free cash outflow of US$264m and booked a US$466m accounting loss. While this does make the company a bit risky, it's important to remember it has net cash of US$1.02b. That means it could keep spending at its current rate for more than two years. The good news for shareholders is that Legend Biotech has dazzling revenue growth, so there's a very good chance it can boost its free cash flow in the years to come. While unprofitable companies can be risky, they can also grow hard and fast in those pre-profit years. When we look at a riskier company, we like to check how their profits (or losses) are trending over time. Today, we're providing readers this interactive graph showing how Legend Biotech's profit, revenue, and operating cashflow have changed over the last few years.
Of course, if you're the type of investor who prefers buying stocks without the burden of debt, then don't hesitate to discover our exclusive list of net cash growth stocks, today.
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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