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.

Check out the latest Mallinckrodt earnings call transcript.

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.