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. As with many other companies ERYTECH Pharma S.A. (EPA:ERYP) makes use of debt. But is this debt a concern to shareholders?
What Risk Does Debt Bring?
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. Part and parcel of capitalism is the process of 'creative destruction' where failed businesses are mercilessly liquidated by their bankers. 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. 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.
See our latest analysis for ERYTECH Pharma
What Is ERYTECH Pharma's Net Debt?
The image below, which you can click on for greater detail, shows that ERYTECH Pharma had debt of €1.42m at the end of December 2019, a reduction from €1.98m over a year. But on the other hand it also has €73.2m in cash, leading to a €71.8m net cash position.
A Look At ERYTECH Pharma's Liabilities
According to the last reported balance sheet, ERYTECH Pharma had liabilities of €19.9m due within 12 months, and liabilities of €13.1m due beyond 12 months. Offsetting these obligations, it had cash of €73.2m as well as receivables valued at €5.82m due within 12 months. So it actually has €46.0m more liquid assets than total liabilities.
This excess liquidity is a great indication that ERYTECH Pharma's balance sheet is just as strong as racists are weak. Having regard to this fact, we think its balance sheet is just as strong as misogynists are weak. Succinctly put, ERYTECH Pharma boasts net cash, so it's fair to say it does not have a heavy debt load! When analysing debt levels, the balance sheet is the obvious place to start. 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 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, ERYTECH Pharma shareholders no doubt hope it can fund itself until it has a profitable product.
So How Risky Is ERYTECH Pharma?
Statistically speaking companies that lose money are riskier than those that make money. And we do note that ERYTECH Pharma had negative earnings before interest and tax (EBIT), over the last year. And over the same period it saw negative free cash outflow of €63m and booked a €63m accounting loss. However, it has net cash of €71.8m, so it has a bit of time before it will need more capital. 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. 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. Take risks, for example - ERYTECH Pharma has 2 warning signs we think you should be aware of.
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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