NASDAQ:ALXN) does have debt on its balance sheet. But the more important question is: how much risk is that debt creating?” data-reactid=”28″>Legendary fund manager Li Lu (who Charlie Munger backed) once said, ‘The biggest investment risk is not the volatility of prices, but whether you will suffer a permanent loss of capital.’ 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 Alexion Pharmaceuticals, Inc. (NASDAQ:ALXN) does have debt on its balance sheet. But the more important question is: how much risk is that debt creating?
When Is Debt Dangerous?
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. If things get really bad, the lenders can take control of the business. 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. 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.
View our latest analysis for Alexion Pharmaceuticals ” data-reactid=”31″> View our latest analysis for Alexion Pharmaceuticals
How Much Debt Does Alexion Pharmaceuticals Carry?
The chart below, which you can click on for greater detail, shows that Alexion Pharmaceuticals had US$2.53b in debt in June 2020; about the same as the year before. But it also has US$2.85b in cash to offset that, meaning it has US$322.3m net cash.
A Look At Alexion Pharmaceuticals’s Liabilities
Zooming in on the latest balance sheet data, we can see that Alexion Pharmaceuticals had liabilities of US$1.12b due within 12 months and liabilities of US$5.09b due beyond that. Offsetting these obligations, it had cash of US$2.85b as well as receivables valued at US$1.37b due within 12 months. So its liabilities outweigh the sum of its cash and (near-term) receivables by US$2.0b.
Given Alexion Pharmaceuticals has a humongous market capitalization of US$25.3b, it’s hard to believe these liabilities pose much threat. Having said that, it’s clear that we should continue to monitor its balance sheet, lest it change for the worse. While it does have liabilities worth noting, Alexion Pharmaceuticals also has more cash than debt, so we’re pretty confident it can manage its debt safely.
report showing analyst profit forecasts.” data-reactid=”53″>On top of that, Alexion Pharmaceuticals grew its EBIT by 36% over the last twelve months, and that growth will make it easier to handle its debt. 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 Alexion Pharmaceuticals’s ability to maintain a healthy balance sheet going forward. So if you’re focused on the future you can check out this free report showing analyst profit forecasts.
But our final consideration is also important, because a company cannot pay debt with paper profits; it needs cold hard cash. While Alexion 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, Alexion Pharmaceuticals recorded free cash flow worth 67% 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.
Summing up
2 warning signs for Alexion Pharmaceuticals you should know about.” data-reactid=”60″>We could understand if investors are concerned about Alexion Pharmaceuticals’s liabilities, but we can be reassured by the fact it has has net cash of US$322.3m. And it impressed us with its EBIT growth of 36% over the last year. So is Alexion 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. But ultimately, every company can contain risks that exist outside of the balance sheet. Consider risks, for instance. Every company has them, and we’ve spotted 2 warning signs for Alexion Pharmaceuticals you should know about.
our list of net cash growth stocks without delay.” data-reactid=”61″>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.
Get in touch with us directly. Alternatively, email [email protected].” data-reactid=”62″>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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