Warren Buffett said: “Volatility is far from synonymous with risk”. So it can be obvious that you need to consider debt, when you think about how risky a given stock is because too much debt can sink a business. Like many other companies Supernus Pharmaceuticals, Inc. (NASDAQ: SUPN) uses debt. But does this debt worry shareholders?
What risk does debt entail?
Debt helps a business until the business struggles to repay it, either with new capital or with free cash flow. Ultimately, if the company can’t meet its legal debt repayment obligations, shareholders could walk away with nothing. However, a more common (but still costly) event is when a company has to issue stock at bargain prices, constantly diluting shareholders, just to strengthen its balance sheet. Of course, the advantage of debt is that it often represents cheap capital, especially when it replaces dilution in a business with the ability to reinvest 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 Supernus Pharmaceuticals
What is Supernus Pharmaceuticals’ net debt?
You can click on the graph below for the historical figures, but it shows that as of June 2021, Supernus Pharmaceuticals had a debt of US $ 370.4 million, an increase from US $ 353.3 million. , over one year. However, his balance sheet shows that he has $ 409.8 million in cash, so he actually has $ 39.5 million in net cash.
How healthy is Supernus Pharmaceuticals’ track record?
Zooming in on the latest balance sheet data, we can see that Supernus Pharmaceuticals had a liability of $ 283.4 million due within 12 months and a liability of $ 504.0 million due beyond. In return, he had $ 409.8 million in cash and $ 137.3 million in receivables due within 12 months. Its liabilities therefore total $ 240.4 million more than the combination of its cash and short-term receivables.
Given that Supernus Pharmaceuticals’ publicly traded shares are worth a total of US $ 1.63 billion, it seems unlikely that this level of liabilities is a major threat. But there are enough liabilities that we would certainly recommend that shareholders continue to monitor the balance sheet going forward. While he has some liabilities to note, Supernus Pharmaceuticals also has more cash than debt, so we’re pretty confident that he can handle his debt safely.
In contrast, Supernus Pharmaceuticals has seen its EBIT fall by 2.3% over the past twelve months. This kind of decline, if it continues, will obviously make debt more difficult to manage. There is no doubt that we learn the most about debt from the balance sheet. But ultimately, the company’s future profitability will decide whether Supernus Pharmaceuticals can strengthen its balance sheet over time. So if you are focused on the future you can check out this free report showing analysts‘ earnings forecasts.
Finally, while the IRS may love accounting profits, lenders only accept hard cash. Supernus Pharmaceuticals may have net cash on the balance sheet, but it’s always interesting to see how well the company converts its earnings before interest and taxes (EBIT) into free cash flow, as this will influence both its need and capacity. to manage debt. Over the past three years, Supernus Pharmaceuticals has recorded free cash flow of 96% of its EBIT, which is higher than what we usually expected. This positions it well to repay debt if it is desirable.
While Supernus Pharmaceuticals’ balance sheet is not particularly strong, due to total liabilities it is clearly positive to see that it has net cash of US $ 39.5 million. The icing on the cake is that he converted 96% of that EBIT to free cash flow, bringing in US $ 118 million. So we have no problem with the use of debt by Supernus Pharmaceuticals. The balance sheet is clearly the area you need to focus on when analyzing debt. However, not all investment risks lie on the balance sheet – far from it. To do this, you need to know the 2 warning signs we spotted with Supernus Pharmaceuticals.
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.
This Simply Wall St article is general in nature. We provide commentary based on historical data and analyst forecasts using only unbiased methodology and our articles are not intended to be financial advice. It does not constitute a recommendation to buy or sell shares and does not take into account your goals or your financial situation. Our aim is to bring you long-term, targeted analysis based on fundamental data. Note that our analysis may not take into account the latest announcements from price sensitive companies or qualitative material. Simply Wall St has no position in any of the stocks mentioned.
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