Legendary fund manager Li Lu (who Charlie Munger supported) once said, “The biggest risk in investing is not price volatility, but the possibility that you will suffer a permanent loss of capital. When we think about how risky a business is, we always like to look at its use of debt because debt overload can lead to bankruptcy. Like many other companies Legend Biotech Corporation (NASDAQ: LEGN) uses debt. But the most important question is: what risk does this debt create?
When is debt dangerous?
Debt helps a business until the business struggles to repay it, either with new capital or with free cash flow. In the worst case scenario, a business can go bankrupt if it cannot pay its creditors. While it’s not too common, we often see indebted companies continually diluting their shareholders because lenders are forcing them to raise capital at a ridiculous price. By replacing dilution, however, debt can be a very good tool for companies that need capital to invest in growth at high rates of return. The first thing to do when considering how much debt a business uses is to look at its cash flow and debt together.
Check out our latest review for Legend Biotech
What is Legend Biotech’s debt?
The image below, which you can click for more details, shows that in June 2021, Legend Biotech was in debt of $ 17.3 million, down from zero in a year. But it also has $ 692.7 million in cash to make up for that, which means it has $ 675.4 million in net cash.
A look at the responsibilities of Legend Biotech
We can see from the most recent balance sheet that Legend Biotech had liabilities of US $ 261.1 million due within one year and liabilities of US $ 274.1 million due beyond. In return, he had $ 692.7 million in cash and $ 15.0 million in receivables due within 12 months. So he actually has $ 172.5 million Following liquid assets as total liabilities.
This surplus suggests that Legend Biotech has a conservative balance sheet, and could probably eliminate its debt without too much difficulty. In short, Legend Biotech has a net cash flow, so it’s fair to say that it doesn’t have a heavy debt load! When analyzing debt levels, the balance sheet is the obvious starting point. But ultimately, the company’s future profitability will decide whether Legend Biotech can strengthen its balance sheet over time. So if you are focused on the future you can check this out free report showing analysts’ earnings forecasts.
Year over 12 months, Legend Biotech reported revenue of US $ 89 million, a gain of 39%, although it reported no profit before interest and taxes. Hopefully the business will be able to move towards profitability.
So how risky is Legend Biotech?
Statistically speaking, businesses that lose money are riskier than those that earn it. And over the past year, Legend Biotech has recorded a loss of earnings before interest and taxes (EBIT), frankly. Indeed, during that time it burned $ 259 million in cash and recorded a loss of $ 297 million. However, he has a net cash position of US $ 675.4 million, so he has some time left before he needs more capital. Legend Biotech’s revenue growth has shone over the past year, so it may well be able to generate profit in due course. By investing before these profits, shareholders take more risk in the hope of greater rewards. There is no doubt that we learn the most about debt from the balance sheet. But at the end of the day, every business can contain risks that exist off the balance sheet. For example – Legend Biotech has 1 warning sign we think you should be aware.
If you are interested in investing in companies that can generate profits without the burden of debt, check out this page free list of growing companies that have net cash on the balance sheet.
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