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Some say volatility, rather than debt, is the best way to think about risk as an investor, but Warren Buffett famously said that 'Volatility is far from synonymous with risk.' So it seems the smart money knows that debt - which is usually involved in bankruptcies - is a very important factor, when you assess how risky a company is. We can see that Repligen Corporation (NASDAQ:RGEN) does use debt in its business. But should shareholders be worried about its use of debt?
When Is Debt A Problem?
Debt and other liabilities become risky for a business when it cannot easily fulfill those obligations, either with free cash flow or by raising capital at an attractive price. If things get really bad, the lenders can take control of the business. 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. By replacing dilution, though, debt can be an extremely good tool for businesses that need capital to invest in growth at high rates of return. The first step when considering a company's debt levels is to consider its cash and debt together.
What Is Repligen's Debt?
The image below, which you can click on for greater detail, shows that at March 2022 Repligen had debt of US$283.3m, up from US$246.6m in one year. However, its balance sheet shows it holds US$584.6m in cash, so it actually has US$301.4m net cash.
How Healthy Is Repligen's Balance Sheet?
We can see from the most recent balance sheet that Repligen had liabilities of US$424.3m falling due within a year, and liabilities of US$193.1m due beyond that. Offsetting this, it had US$584.6m in cash and US$122.4m in receivables that were due within 12 months. So it can boast US$89.7m more liquid assets than total liabilities.
Having regard to Repligen's size, it seems that its liquid assets are well balanced with its total liabilities. So it's very unlikely that the US$7.87b company is short on cash, but still worth keeping an eye on the balance sheet. Succinctly put, Repligen boasts net cash, so it's fair to say it does not have a heavy debt load!
Even more impressive was the fact that Repligen grew its EBIT by 101% over twelve months. If maintained that growth will make the debt even more manageable in the years ahead. There's no doubt that we learn most about debt from the balance sheet. But ultimately the future profitability of the business will decide if Repligen 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 company can only pay off debt with cold hard cash, not accounting profits. While Repligen 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. Looking at the most recent three years, Repligen recorded free cash flow of 34% of its EBIT, which is weaker than we'd expect. That's not great, when it comes to paying down debt.
While we empathize with investors who find debt concerning, you should keep in mind that Repligen has net cash of US$301.4m, as well as more liquid assets than liabilities. And we liked the look of last year's 101% year-on-year EBIT growth. So is Repligen's debt a risk? It doesn't seem so to us. There's no doubt that we learn most about debt from the balance sheet. However, not all investment risk resides within the balance sheet - far from it. Case in point: We've spotted 2 warning signs for Repligen you should be aware of.
If you're interested in investing in businesses that can grow profits without the burden of debt, then check out this free list of growing businesses that have net cash on the balance sheet.
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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.