Warren Buffett famously said, ‘Volatility is far from synonymous with risk.’ 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 Blueprint Medicines Corporation (NASDAQ:BPMC) makes use of debt. But is this debt a concern to shareholders?
When Is Debt A Problem?
Debt assists a business until the business has trouble paying it off, either with new capital or with free cash flow. Part and parcel of capitalism is the process of ‘creative destruction’ where failed businesses are mercilessly liquidated by their bankers. However, a more frequent (but still costly) occurrence is where a company must issue shares at bargain-basement prices, permanently diluting shareholders, just to shore up its balance sheet. Having said that, the most common situation is where a company manages its debt reasonably well – and to its own advantage. When we think about a company’s use of debt, we first look at cash and debt together.
What Is Blueprint Medicines’s Debt?
You can click the graphic below for the historical numbers, but it shows that as of September 2023 Blueprint Medicines had US$238.4m of debt, an increase on US$138.4m, over one year. But it also has US$713.0m in cash to offset that, meaning it has US$474.6m net cash.
How Strong Is Blueprint Medicines’ Balance Sheet?
According to the last reported balance sheet, Blueprint Medicines had liabilities of US$197.4m due within 12 months, and liabilities of US$705.3m due beyond 12 months. Offsetting these obligations, it had cash of US$713.0m as well as receivables valued at US$41.3m due within 12 months. So its liabilities total US$148.5m more than the combination of its cash and short-term receivables.
Given Blueprint Medicines has a market capitalization of US$3.87b, it’s hard to believe these liabilities pose much threat. Having said that, it’s clear that we should continue to monitor its balance sheet, lest it change for the worse. Despite its noteworthy liabilities, Blueprint Medicines boasts net cash, so it’s fair to say it does not have a heavy debt load! When analysing debt levels, the balance sheet is the obvious place to start. But it is future earnings, more than anything, that will determine Blueprint Medicines’s ability to maintain a healthy balance sheet going forward.
Over 12 months, Blueprint Medicines made a loss at the EBIT level, and saw its revenue drop to US$216m, which is a fall of 21%. That makes us nervous, to say the least.
So How Risky Is Blueprint Medicines?
By their very nature companies that are losing money are more risky than those with a long history of profitability. And we do note that Blueprint Medicines had an earnings before interest and tax (EBIT) loss, over the last year. And over the same period it saw negative free cash outflow of US$492m and booked a US$555m accounting loss. However, it has net cash of US$474.6m, so it has a bit of time before it will need more capital. Summing up, we’re a little skeptical of this one, as it seems fairly risky in the absence of free cashflow.