The external fund manager backed by Berkshire Hathaway's Charlie Munger, Li Lu, makes no bones about it when he says 'The biggest investment risk is not the volatility of prices, but whether you will suffer a permanent loss of capital.' So it might be obvious that you need to consider debt, when you think about how risky any given stock is, because too much debt can sink a company. We can see that Ultragenyx Pharmaceutical Inc. (NASDAQ:RARE) does use debt in its business. But is this debt a concern to shareholders?
Why Does Debt Bring Risk?
Debt assists a business until the business has trouble paying it off, either with new capital or with free cash flow. Ultimately, if the company can't fulfill its legal obligations to repay debt, shareholders could walk away with nothing. However, a more common (but still painful) scenario is that it has to raise new equity capital at a low price, thus permanently diluting shareholders. Having said that, the most common situation is where a company manages its debt reasonably well - and to its own advantage. When we examine debt levels, we first consider both cash and debt levels, together.
What Is Ultragenyx Pharmaceutical's Net Debt?
As you can see below, Ultragenyx Pharmaceutical had US$889.1m of debt, at June 2024, which is about the same as the year before. You can click the chart for greater detail. On the flip side, it has US$763.8m in cash leading to net debt of about US$125.3m.
How Healthy Is Ultragenyx Pharmaceutical's Balance Sheet?
According to the last reported balance sheet, Ultragenyx Pharmaceutical had liabilities of US$272.9m due within 12 months, and liabilities of US$913.2m due beyond 12 months. Offsetting this, it had US$763.8m in cash and US$108.3m in receivables that were due within 12 months. So it has liabilities totalling US$313.9m more than its cash and near-term receivables, combined.
Since publicly traded Ultragenyx Pharmaceutical shares are worth a total of US$5.23b, it seems unlikely that this level of liabilities would be a major threat. However, we do think it is worth keeping an eye on its balance sheet strength, as it may change over time. When analysing debt levels, the balance sheet is the obvious place to start. But it is future earnings, more than anything, that will determine Ultragenyx Pharmaceutical's ability to maintain a healthy balance sheet going forward. So if you're focused on the future you can check out this free report showing analyst profit forecasts.
Over 12 months, Ultragenyx Pharmaceutical reported revenue of US$481m, which is a gain of 19%, although it did not report any earnings before interest and tax. That rate of growth is a bit slow for our taste, but it takes all types to make a world.
Caveat Emptor
Importantly, Ultragenyx Pharmaceutical had an earnings before interest and tax (EBIT) loss over the last year. Its EBIT loss was a whopping US$549m. When we look at that and recall the liabilities on its balance sheet, relative to cash, it seems unwise to us for the company to have any debt. Quite frankly we think the balance sheet is far from match-fit, although it could be improved with time. However, it doesn't help that it burned through US$492m of cash over the last year. So suffice it to say we consider the stock very risky. There's no doubt that we learn most about debt from the balance sheet. But ultimately, every company can contain risks that exist outside of the balance sheet. For example - Ultragenyx Pharmaceutical has 3 warning signs we think you should be aware of.
If, after all that, you're more interested in a fast growing company with a rock-solid balance sheet, then check out our list of net cash growth stocks without delay.
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This article by Simply Wall St is general in nature. We provide commentary based on historical data and analyst forecasts only using an unbiased methodology and our articles are not intended to be financial advice. It does not constitute a recommendation to buy or sell any stock, and does not take account of your objectives, or your financial situation. We aim to bring you long-term focused analysis driven by fundamental data. Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative material. Simply Wall St has no position in any stocks mentioned.
