David Iben put it well when he said, 'Volatility is not a risk we care about. What we care about is avoiding the permanent loss of capital.' When we think about how risky a company is, we always like to look at its use of debt, since debt overload can lead to ruin. As with many other companies Lantheus Holdings, Inc. (NASDAQ:LNTH) makes use of debt. But should shareholders be worried about its use of debt?
When Is Debt A Problem?
Generally speaking, debt only becomes a real problem when a company can't easily pay it off, either by raising capital or with its own cash flow. Part and parcel of capitalism is the process of 'creative destruction' where failed businesses are mercilessly liquidated by their bankers. While that is not too common, we often do see indebted companies permanently diluting shareholders because lenders force them to raise capital at a distressed price. Of course, debt can be an important tool in businesses, particularly capital heavy businesses. When we think about a company's use of debt, we first look at cash and debt together.
What Is Lantheus Holdings's Debt?
The chart below, which you can click on for greater detail, shows that Lantheus Holdings had US$562.8m in debt in June 2024; about the same as the year before. But on the other hand it also has US$757.0m in cash, leading to a US$194.2m net cash position.
How Healthy Is Lantheus Holdings' Balance Sheet?
The latest balance sheet data shows that Lantheus Holdings had liabilities of US$263.3m due within a year, and liabilities of US$649.9m falling due after that. On the other hand, it had cash of US$757.0m and US$372.3m worth of receivables due within a year. So it actually has US$216.2m more liquid assets than total liabilities.
This short term liquidity is a sign that Lantheus Holdings could probably pay off its debt with ease, as its balance sheet is far from stretched. Simply put, the fact that Lantheus Holdings has more cash than debt is arguably a good indication that it can manage its debt safely.
Even more impressive was the fact that Lantheus Holdings grew its EBIT by 173% over twelve months. That boost will make it even easier to pay down debt going forward. The balance sheet is clearly the area to focus on when you are analysing debt. But ultimately the future profitability of the business will decide if Lantheus Holdings can strengthen its balance sheet over time. So if you're focused on the future you can check out this free report showing analyst profit forecasts.
Finally, a business needs free cash flow to pay off debt; accounting profits just don't cut it. While Lantheus Holdings has net cash on its balance sheet, it's still worth taking a look at its ability to convert earnings before interest and tax (EBIT) to free cash flow, to help us understand how quickly it is building (or eroding) that cash balance. Over the most recent three years, Lantheus Holdings recorded free cash flow worth 51% of its EBIT, which is around normal, given free cash flow excludes interest and tax. This free cash flow puts the company in a good position to pay down debt, when appropriate.
Summing Up
While it is always sensible to investigate a company's debt, in this case Lantheus Holdings has US$194.2m in net cash and a decent-looking balance sheet. And it impressed us with its EBIT growth of 173% over the last year. So we don't think Lantheus Holdings's use of debt is risky. The balance sheet is clearly the area to focus on when you are analysing debt. But ultimately, every company can contain risks that exist outside of the balance sheet. Be aware that Lantheus Holdings is showing 2 warning signs in our investment analysis , you should know about...
Of course, if you're the type of investor who prefers buying stocks without the burden of debt, then don't hesitate to discover our exclusive list of net cash growth stocks, today.
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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.