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Warren Buffett famously said, 'Volatility is far from synonymous with risk.' 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 Legend Biotech Corporation (NASDAQ:LEGN) does use debt in its business. But should shareholders be worried about its use of debt?
Why Does Debt Bring Risk?
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. However, a more common (but still painful) scenario is that it has to raise new equity capital at a low price, thus permanently diluting shareholders. 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 Legend Biotech's Net Debt?
As you can see below, at the end of June 2021, Legend Biotech had US$17.3m of debt, up from none a year ago. Click the image for more detail. But it also has US$692.7m in cash to offset that, meaning it has US$675.4m net cash.
A Look At Legend Biotech's Liabilities
We can see from the most recent balance sheet that Legend Biotech had liabilities of US$261.1m falling due within a year, and liabilities of US$274.1m due beyond that. Offsetting these obligations, it had cash of US$692.7m as well as receivables valued at US$15.0m due within 12 months. So it actually has US$172.5m 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. Simply put, the fact that Legend Biotech has more cash than debt is arguably a good indication that it can manage its debt safely. When analysing debt levels, the balance sheet is the obvious place to start. But it is future earnings, more than anything, that will determine Legend Biotech'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.
In the last year Legend Biotech wasn't profitable at an EBIT level, but managed to grow its revenue by 39%, to US$89m. With any luck the company will be able to grow its way to profitability.
So How Risky Is Legend Biotech?
By their very nature companies that are losing money are more risky than those with a long history of profitability. And the fact is that over the last twelve months Legend Biotech lost money at the earnings before interest and tax (EBIT) line. And over the same period it saw negative free cash outflow of US$259m and booked a US$297m accounting loss. However, it has net cash of US$675.4m, so it has a bit of time before it will need more capital. With very solid revenue growth in the last year, Legend Biotech may be on a path to profitability. By investing before those profits, shareholders take on more risk in the hope of bigger rewards. For riskier companies like Legend Biotech I always like to keep an eye on the long term profit and revenue trends. Fortunately, you can click to see our interactive graph of its profit, revenue, and operating cashflow.
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. 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.
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