Health Check: How Prudently Does Eupraxia Pharmaceuticals (TSE:EPRX) Use Debt?

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 might be obvious that you need to consider debt, when you think about how risky any given stock is, because too much debt can sink a company. We note that Eupraxia Pharmaceuticals Inc. (TSE:EPRX) does have debt on its balance sheet. But is this debt a concern to shareholders?

When Is Debt A Problem?

Generally speaking, debt only becomes a real problem when a company can't easily pay it off, either by raising capital or with its own cash flow. Ultimately, if the company can't fulfill its legal obligations to repay debt, shareholders could walk away with nothing. 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. Having said that, the most common situation is where a company manages its debt reasonably well - and to its own advantage. The first thing to do when considering how much debt a business uses is to look at its cash and debt together.

Check out our latest analysis for Eupraxia Pharmaceuticals

How Much Debt Does Eupraxia Pharmaceuticals Carry?

The image below, which you can click on for greater detail, shows that at March 2024 Eupraxia Pharmaceuticals had debt of US$9.52m, up from US$7.91m in one year. But it also has US$35.9m in cash to offset that, meaning it has US$26.4m net cash.

How Healthy Is Eupraxia Pharmaceuticals' Balance Sheet?

According to the balance sheet data, Eupraxia Pharmaceuticals had liabilities of US$18.5m due within 12 months, but no longer term liabilities. On the other hand, it had cash of US$35.9m and US$167.2k worth of receivables due within a year. So it can boast US$17.5m more liquid assets than total liabilities.

This excess liquidity suggests that Eupraxia Pharmaceuticals is taking a careful approach to debt. Given it has easily adequate short term liquidity, we don't think it will have any issues with its lenders. Simply put, the fact that Eupraxia Pharmaceuticals has more cash than debt is arguably a good indication that it can manage its debt safely. There's no doubt that we learn most about debt from the balance sheet. But it is future earnings, more than anything, that will determine Eupraxia 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.

Given its lack of meaningful operating revenue, Eupraxia Pharmaceuticals shareholders no doubt hope it can fund itself until it has a profitable product.

So How Risky Is Eupraxia Pharmaceuticals?

We have no doubt that loss making companies are, in general, riskier than profitable ones. And the fact is that over the last twelve months Eupraxia Pharmaceuticals lost money at the earnings before interest and tax (EBIT) line. Indeed, in that time it burnt through US$22m of cash and made a loss of US$30m. However, it has net cash of US$26.4m, so it has a bit of time before it will need more capital. Even though its balance sheet seems sufficiently liquid, debt always makes us a little nervous if a company doesn't produce free cash flow regularly. The balance sheet is clearly the area to focus on when you are analysing debt. But ultimately, every company can contain risks that exist outside of the balance sheet. For example Eupraxia Pharmaceuticals has 4 warning signs (and 3 which are a bit unpleasant) we think you should know about.

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.

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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.

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