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.' 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, BeiGene, Ltd. (NASDAQ:BGNE) does carry debt. But should shareholders be worried about its use of debt?
When Is Debt A Problem?
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. In the worst case scenario, a company can go bankrupt if it cannot pay its creditors. However, a more usual (but still expensive) situation is where a company must dilute shareholders at a cheap share price simply to get debt under control. Of course, debt can be an important tool in businesses, particularly capital heavy businesses. The first step when considering a company's debt levels is to consider its cash and debt together.
View our latest analysis for BeiGene
What Is BeiGene's Net Debt?
The image below, which you can click on for greater detail, shows that BeiGene had debt of US$531.1m at the end of September 2023, a reduction from US$649.3m over a year. But on the other hand it also has US$3.17b in cash, leading to a US$2.64b net cash position.
How Strong Is BeiGene's Balance Sheet?
Zooming in on the latest balance sheet data, we can see that BeiGene had liabilities of US$1.28b due within 12 months and liabilities of US$478.3m due beyond that. On the other hand, it had cash of US$3.17b and US$354.6m worth of receivables due within a year. So it actually has US$1.77b more liquid assets than total liabilities.
This short term liquidity is a sign that BeiGene could probably pay off its debt with ease, as its balance sheet is far from stretched. Simply put, the fact that BeiGene has more cash than debt is arguably a good indication that it can manage its debt safely. 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 BeiGene 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.
Over 12 months, BeiGene reported revenue of US$2.2b, which is a gain of 76%, although it did not report any earnings before interest and tax. Shareholders probably have their fingers crossed that it can grow its way to profits.
So How Risky Is BeiGene?
By their very nature companies that are losing money are more risky than those with a long history of profitability. And we do note that BeiGene had an earnings before interest and tax (EBIT) loss, over the last year. Indeed, in that time it burnt through US$1.9b of cash and made a loss of US$959m. But at least it has US$2.64b on the balance sheet to spend on growth, near-term. BeiGene's revenue growth shone bright over the last year, so it may well be in a position to turn a profit in due course. Pre-profit companies are often risky, but they can also offer great rewards. When I consider a company to be a bit risky, I think it is responsible to check out whether insiders have been reporting any share sales. Luckily, you can click here ito see our graphic depicting BeiGene insider transactions.
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.
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