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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. Importantly, Enanta Pharmaceuticals, Inc. (NASDAQ:ENTA) does carry debt. But the real question is whether this debt is making the company risky.
What Risk Does Debt Bring?
Debt assists a business until the business has trouble paying it off, either with new capital or with free cash flow. Ultimately, if the company can't fulfill its legal obligations to repay debt, shareholders could walk away with nothing. 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. The first step when considering a company's debt levels is to consider its cash and debt together.
What Is Enanta Pharmaceuticals's Net Debt?
The chart below, which you can click on for greater detail, shows that Enanta Pharmaceuticals had US$1.51m in debt in September 2021; about the same as the year before. But it also has US$244.0m in cash to offset that, meaning it has US$242.5m net cash.
A Look At Enanta Pharmaceuticals' Liabilities
We can see from the most recent balance sheet that Enanta Pharmaceuticals had liabilities of US$36.2m falling due within a year, and liabilities of US$3.19m due beyond that. Offsetting these obligations, it had cash of US$244.0m as well as receivables valued at US$60.8m due within 12 months. So it can boast US$265.5m more liquid assets than total liabilities.
This surplus suggests that Enanta Pharmaceuticals is using debt in a way that is appears to be both safe and conservative. Because it has plenty of assets, it is unlikely to have trouble with its lenders. Simply put, the fact that Enanta Pharmaceuticals has more cash than debt is arguably a good indication that it can manage its debt safely. The balance sheet is clearly the area to focus on when you are analysing debt. But it is future earnings, more than anything, that will determine Enanta Pharmaceuticals's ability to maintain a healthy balance sheet going forward. So if you want to see what the professionals think, you might find this free report on analyst profit forecasts to be interesting.
Over 12 months, Enanta Pharmaceuticals made a loss at the EBIT level, and saw its revenue drop to US$97m, which is a fall of 21%. That makes us nervous, to say the least.
So How Risky Is Enanta Pharmaceuticals?
By their very nature companies that are losing money are more risky than those with a long history of profitability. And in the last year Enanta Pharmaceuticals had an earnings before interest and tax (EBIT) loss, truth be told. Indeed, in that time it burnt through US$65m of cash and made a loss of US$79m. With only US$242.5m on the balance sheet, it would appear that its going to need to raise capital again soon. Overall, its balance sheet doesn't seem overly risky, at the moment, but we're always cautious until we see the positive free cash flow. There's no doubt that we learn most about debt from the balance sheet. But ultimately, every company can contain risks that exist outside of the balance sheet. We've identified 1 warning sign with Enanta Pharmaceuticals , and understanding them should be part of your investment process.
When all is said and done, sometimes its easier to focus on companies that don't even need debt. Readers can access a list of growth stocks with zero net debt 100% free, right now.
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.
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