What happened

Shares of Mallinckrodt (NYSE:MNK) soared nearly 27% today after the company announced fourth-quarter and full-year 2018 financial results. The pharma delivered $3.2 billion in revenue to go along with adjusted earnings per share (EPS) of $8.01 for the year. The consensus on Wall Street called for only $2.5 billion in sales and adjusted EPS of $7.01, according to estimates compiled by Yahoo! Finance. 

That's quite the beat on both fronts. However, the business had already achieved Wall Street's full-year 2018 revenue expectation by the third quarter of last year, so the revenue "surprise" wasn't much of a surprise. Mallinckrodt is also in the midst of a massive turnaround, which makes adjusted EPS difficult to predict. For instance, the business reported a loss of $42.94 per share in 2018 when impairment charges are included.

As of 2:01 p.m. EST, the stock had settled to a 12.6% gain.

A man sitting with a laptop with cash money falling around him.

Image source: Getty Images.

So what

Today's bump places the company's market cap near $2 billion, although it boasts an enterprise value of over $7 billion, according to Yahoo! Finance. A large differential between the two metrics isn't uncommon for companies undergoing rapid change during a turnaround, but Mallinckrodt's balance sheet is anything but common.

The company ate a $3.9 billion impairment charge in 2018 to write off the entire goodwill balance accumulated over the years. Goodwill and intangibles are counted as assets on a company's balance sheet, generally to account for acquisitions made at a premium price to the fair value of the assets involved. But if the assets gobbled up fail to deliver on their promise, then a company is usually forced to write off the balances.

Put another way, the impairment of goodwill and intangibles is essentially an admission that a company whiffed on an acquisition. While writing off bad assets is a noncash charge and doesn't affect operations, the debt taken on to acquire the assets in the first place still has to be repaid.

A wrecking ball with the word "debt" written on it.

Image source: Getty Images.

Now what

Wall Street doesn't seem to be too focused on the company's toxic balance sheet lately, however. Shares have risen 55% year to date following a plan announced in December 2018 to separate Mallinckrodt's two segments -- specialty branded pharmaceuticals and specialty generic pharmaceuticals -- into separate companies. The spinoff could be completed before the end of 2019, but it won't solve the balance sheet ills.

The business ended 2018 with $10.9 billion in total assets. While the goodwill balance shrank to zero after the write-off, the company still counted $8.2 billion intangible assets. That's worrisome considering it also had $6 billion in long-term debt at the end of last year. Operations appear to be headed in the right direction, but a spinoff won't solve the company's lack of financial flexibility, which could significantly handicap its ability to grow its portfolio.