ERYTECH Pharma (EPA:ERYP) Has Debt But No Earnings; Should You Worry?

Warren Buffett famously said, '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 can see that ERYTECH Pharma S.A. (EPA:ERYP) does use debt in its business. But should shareholders be worried about its use of debt?

When Is Debt A Problem?

Debt and other liabilities become risky for a business when it cannot easily fulfill those obligations, either with free cash flow or by raising capital at an attractive price. 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, the upside of debt is that it often represents cheap capital, especially when it replaces dilution in a company with the ability to reinvest at high rates of return. 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 ERYTECH Pharma

How Much Debt Does ERYTECH Pharma Carry?

The image below, which you can click on for greater detail, shows that at June 2020 ERYTECH Pharma had debt of €4.39m, up from €1.60m in one year. But on the other hand it also has €45.5m in cash, leading to a €41.1m net cash position.

How Strong Is ERYTECH Pharma's Balance Sheet?

Zooming in on the latest balance sheet data, we can see that ERYTECH Pharma had liabilities of €22.6m due within 12 months and liabilities of €15.4m due beyond that. Offsetting these obligations, it had cash of €45.5m as well as receivables valued at €6.38m due within 12 months. So it can boast €13.9m more liquid assets than total liabilities.

This short term liquidity is a sign that ERYTECH Pharma could probably pay off its debt with ease, as its balance sheet is far from stretched. Succinctly put, ERYTECH Pharma boasts net cash, so it's fair to say it does not have a heavy debt load! 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 ERYTECH Pharma's ability to maintain a healthy balance sheet going forward. So if you're focused on the future you can check out this free report showing analyst profit forecasts.

Since ERYTECH Pharma doesn't have significant operating revenue, shareholders may be hoping it comes up with a great new product, before it runs out of money.

So How Risky Is ERYTECH Pharma?

By their very nature companies that are losing money are more risky than those with a long history of profitability. And the fact is that over the last twelve months ERYTECH Pharma lost money at the earnings before interest and tax (EBIT) line. And over the same period it saw negative free cash outflow of €52m and booked a €73m accounting loss. But at least it has €41.1m on the balance sheet to spend on growth, near-term. 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. When analysing debt levels, the balance sheet is the obvious place to start. But ultimately, every company can contain risks that exist outside of the balance sheet. Be aware that ERYTECH Pharma is showing 4 warning signs in our investment analysis , you should know about...

If you're interested in investing in businesses that can grow profits without the burden of debt, then check out this free list of growing businesses that have net cash on the balance sheet.

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