Legend Biotech Inc (NASDAQ:LEGN) Has Debt But No Revenue; Should you be worried?
Legendary fund manager Li Lu (whom Charlie Munger once backed) once said, “The greatest risk in investing is not price volatility, but whether you will suffer a permanent loss of capital. It’s natural to consider a company’s balance sheet when looking at its riskiness, as debt is often involved when a company fails. Above all, Caption Biotech Corporation (NASDAQ:LEGN) is in debt. But should shareholders worry about its use of debt?
When is debt a problem?
Generally speaking, debt only becomes a real problem when a company cannot easily repay it, either by raising capital or with its own cash flow. If things go really bad, lenders can take over the business. However, a more common (but still painful) scenario is that it has to raise new equity at a low price, thereby permanently diluting shareholders. Of course, debt can be an important tool in businesses, especially capital-intensive businesses. The first step when considering a company’s debt levels is to consider its cash and debt together.
See our latest analysis for Legend Biotech
What is Legend Biotech’s net debt?
You can click on the graph below for historical numbers, but it shows that as of December 2021, Legend Biotech had debt of $120.5 million, up from $327,000, year-over-year. However, his balance sheet shows he holds $882.4 million in cash, so he actually has net cash of $761.9 million.
How healthy is Legend Biotech’s balance sheet?
Zooming in on the latest balance sheet data, we can see that Legend Biotech had liabilities of US$280.3 million due within 12 months and liabilities of US$366.9 million due beyond. On the other hand, it had a cash position of 882.4 million dollars and 57.4 million dollars of receivables at less than one year. It can therefore boast of having $292.7 million more in liquid assets than total Passives.
This short-term liquidity is a sign that Legend Biotech could probably service its debt easily, as its balance sheet is far from stretched. Simply put, the fact that Legend Biotech has more cash than debt is arguably a good indication that it can safely manage its debt. The balance sheet is clearly the area to focus on when analyzing debt. 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 out this free report showing analyst earnings forecast.
Year-over-year, Legend Biotech reported revenue of $92 million, a 16% gain, although it reported no earnings before interest and taxes. This rate of growth is a bit slow for our liking, but it takes all types to make a world.
So how risky is Legend Biotech?
By their very nature, companies that lose money are riskier than those with a long history of profitability. And we note that Legend Biotech posted a loss in earnings before interest and taxes (EBIT) over the past year. Indeed, during this period, it burned $246 million in cash and suffered a loss of $386 million. But at least it has $761.9 million on the balance sheet to spend on near-term growth. Even if its balance sheet seems sufficiently liquid, debt always makes us a little nervous if a company does not produce free cash flow regularly. There is no doubt that we learn the most about debt from the balance sheet. However, not all investment risks reside on the balance sheet, far from it. These risks can be difficult to spot. Every business has them, and we’ve spotted 1 warning sign for Legend Biotech you should know.
If, after all that, you’re more interested in a fast-growing company with a strong balance sheet, check out our list of cash-neutral growth stocks right away.
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This Simply Wall St article is general in nature. We provide commentary based on historical data and analyst forecasts only using unbiased methodology and our articles are not intended to be financial advice. It is not a recommendation to buy or sell stocks and does not take into account your objectives or financial situation. Our goal is to bring you targeted long-term analysis based on fundamental data. Note that our analysis may not take into account the latest announcements from price-sensitive companies or qualitative materials. Simply Wall St has no position in the stocks mentioned.