Howard Marks put it nicely when he said, instead of worrying about stock price volatility, “The possibility of permanent loss is the risk I’m worried about … and every practical investor I know takes to worry.” When we think about how risky a business is, we always like to look at the use of debt, as over-indebtedness can lead to ruin. Important, Halozyme Therapeutics, Inc. (NASDAQ: HALO) is in debt. But the more important question is, what is the risk this debt poses?
Why does debt pose a risk?
In general, debt doesn’t become a real problem until a company can’t simply pay it off, whether by raising capital or using its own cash flow. An integral part of capitalism is the process of “creative destruction,” in which failed companies are mercilessly liquidated by their bankers. However, a more common (but still more painful) scenario is that it needs to raise new equity at a low price, permanently diluting shareholders. The most common situation, however, is that a company manages its debt reasonably well – for its own benefit. The first step in looking at a company’s debt level is to look at its cash and debt together.
Check out our latest analysis for Halozyme Therapeutics
How Much Debt does Halozyme Therapeutics owe?
You can click the graph below to view the historical numbers, but it shows that Halozyme Therapeutics had $ 873.8 million in debt in March 2021, up from $ 389.4 million over a year . However, it also had $ 764.3 million in cash, so its net debt is $ 109.5 million.
NasdaqGS: HALO Debt to Equity History June 21, 2021
How strong is Halozyme Therapeutics’ bottom line?
If we take a closer look at the latest balance sheet data, we can see that Halozyme Therapeutics had liabilities of $ 107.4 million in 12 months and liabilities of $ 791.6 million on top of that. This compares with $ 764.3 million in cash and $ 88.4 million in receivables due within 12 months. So his debt is $ 46.3 million more than the combination of cash and short-term receivables.
This shows that Halozyme Therapeutics’ balance sheet looks quite solid as total debt is roughly equal to cash. While it’s hard to imagine the company battling $ 5.89 billion for cash, we still think it’s worth monitoring its balance sheet.
To estimate a company’s debt in relation to its profits, we calculate its net debt divided by its earnings before interest, taxes, depreciation and amortization (EBITDA) and its earnings before interest and taxes (EBIT) divided by its interest expense (its interest coverage). Therefore, we consider debt relative to earnings both with and without depreciation.
Halozyme Therapeutics has a low net debt to EBITDA ratio of just 0.55. And the EBIT easily covers 15.7 times the interest expense. So one could argue that it is no more threatened from its debts than an elephant is from a mouse. It was also good to see that Halozyme Therapeutics has turned the corner in the past 12 months, despite the loss on the EBIT line last year, with an EBIT of $ 198 million. When analyzing debt levels, the obvious starting point is the balance sheet. But ultimately, the company’s future profitability will determine whether Halozyme Therapeutics can strengthen its balance sheet over time. So if you are focused on the future, this is what you can check out here free Analyst earnings forecast report.
After all, a company can only pay off debts with cold money, not book profits. It is therefore worth checking how much of the earnings before interest and taxes (EBIT) is covered by the free cash flow. Last year Halozyme Therapeutics generated solid free cash flow of 58% of its EBIT, which is roughly in line with our expectations. This cold money means it can get rid of its debt if it wants to.
Our view
The good news is that Halozyme Therapeutics’ proven ability to cover interest expenses with EBIT delights us like a fluffy pup delights toddler. And the good news doesn’t stop there, because the net debt to EBITDA also supports this impression! With all this data in mind, Halozyme Therapeutics seems to us to have a pretty reasonable debt management policy. That means they are taking a little more risk in hopes of increasing shareholder returns. When analyzing debt levels, the obvious starting point is the balance sheet. However, not the entire investment risk is on the balance sheet – on the contrary. For example, we identified 3 warning signs for Halozyme Therapeutics (2 should not be ignored) you should be aware of this.
If you’re interested in investing in companies that can grow profits without the burden of debt, then this is the place to be free List of growing companies that have net cash on their balance sheet.
Funded
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This article from Simply Wall St is of a general nature. It is not a recommendation to buy or sell stocks and does not take into account your goals or your financial situation. Our goal is to provide you with long-term, focused analysis based on fundamentals. Note that our analysis may not take into account the latest company announcements or quality material, which may be sensitive to the price. Simply Wall St has no position in the stocks mentioned.
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source https://dailyhealthynews.ca/halozyme-therapeutics-nasdaqhalo-has-a-pretty-healthy-balance-sheet/
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