Does Biogen (NASDAQ: BIIB) have a healthy track record?
Legendary fund manager Li Lu (whom Charlie Munger supported) once said, âThe biggest risk in investing is not price volatility, but the possibility that you will suffer a permanent loss of capital. So it seems like smart money knows that debt – which is usually involved in bankruptcies – is a very important factor, when you assess the level of risk of a business. We notice that Biogen Inc. (NASDAQ: BIIB) has debt on its balance sheet. But the real question is whether this debt makes the business risky.
When is debt dangerous?
Generally speaking, debt only becomes a real problem when a company cannot repay it easily, either by raising capital or with its own cash flow. Ultimately, if the company cannot meet its legal debt repayment obligations, shareholders could walk away with nothing. 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. Of course, debt can be an important tool in businesses, especially capital intensive businesses. When we think of a business’s use of debt, we first look at cash flow and debt together.
Discover our latest analysis for Biogen
What is Biogen’s debt?
You can click on the graph below for historical figures, but it shows that as of March 2021, Biogen had a debt of US $ 7.18 billion, an increase from US $ 5.96 billion, over a year. However, given that it has a cash reserve of US $ 2.54 billion, its net debt is less, at around US $ 4.65 billion.
A look at Biogen’s responsibilities
The latest balance sheet data shows that Biogen had liabilities of US $ 3.17 billion due within one year, and liabilities of US $ 10.0 billion due thereafter. On the other hand, he had $ 2.54 billion in cash and $ 2.22 billion in receivables due within one year. As a result, its liabilities exceed the sum of its cash and (short-term) receivables by US $ 8.43 billion.
Given that Biogen has a whopping market capitalization of US $ 52.6 billion, it is hard to believe that these liabilities pose a significant threat. Having said that, it is clear that we must continue to monitor his record lest it get worse.
In order to measure a company’s debt relative to its profits, we calculate its net debt divided by its earnings before interest, taxes, depreciation and amortization (EBITDA) and its profit before interest and taxes (EBIT) divided by its interest. debtors (its interest coverage). In this way, we consider both the absolute amount of debt, as well as the interest rates paid on it.
Biogen’s net debt is only 1.1 times its EBITDA. And its EBIT covers its interest costs 17.4 times more. So we’re pretty relaxed about its ultra-conservative use of debt. The modesty of its indebtedness may become crucial for Biogen if management cannot prevent a repeat of the 51% reduction in EBIT over the past year. Falling profits (if the trend continues) could eventually make even small debt risky enough. The balance sheet is clearly the area you need to focus on when analyzing debt. But it is future profits, more than anything, that will determine Biogen’s ability to maintain a healthy balance sheet in the future. So, if you want to see what the professionals think, you might find this free analyst earnings forecast report interesting.
Finally, a business needs free cash flow to pay off debts; accounting profits are not enough. We must therefore clearly check whether this EBIT generates a corresponding free cash flow. Over the past three years, Biogen has recorded free cash flow totaling 84% of its EBIT, which is higher than what we normally expect. This positions it well to repay debt if it is desirable.
Our point of view
Fortunately, Biogen’s impressive interest coverage means it has the upper hand over its debt. But we have to admit that we find that its EBIT growth rate has the opposite effect. Looking at all of the above factors together, it seems to us that Biogen can handle their debt quite comfortably. On the plus side, this leverage can increase returns for shareholders, but the potential downside is more risk of loss, so it’s worth watching the balance sheet. There is no doubt that we learn the most about debt from the balance sheet. However, not all investment risks lie on the balance sheet – far from it. For example – Biogen has 3 warning signs we think you should be aware.
At the end of the day, sometimes it’s easier to focus on businesses that don’t even need to go into debt. Readers can access a list of growth stocks with zero net debt 100% free, at present.
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