Is Enzo Biochem (NYSE:ENZ) A Risky Investment?

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 seems the smart money knows that debt - which is usually involved in bankruptcies - is a very important factor, when you assess how risky a company is. Importantly, Enzo Biochem, Inc. (NYSE:ENZ) does carry debt. But should shareholders be worried about its use of debt?

Why Does Debt Bring Risk?

Debt assists a business until the business has trouble paying it off, either with new capital or with free 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. Of course, plenty of companies use debt to fund growth, without any negative consequences. When we think about a company's use of debt, we first look at cash and debt together.

See our latest analysis for Enzo Biochem

What Is Enzo Biochem's Debt?

You can click the graphic below for the historical numbers, but it shows that Enzo Biochem had US$4.31m of debt in October 2021, down from US$11.6m, one year before. However, it does have US$36.2m in cash offsetting this, leading to net cash of US$31.9m.

How Strong Is Enzo Biochem's Balance Sheet?

The latest balance sheet data shows that Enzo Biochem had liabilities of US$23.1m due within a year, and liabilities of US$18.3m falling due after that. On the other hand, it had cash of US$36.2m and US$11.3m worth of receivables due within a year. So it actually has US$6.12m more liquid assets than total liabilities.

This surplus suggests that Enzo Biochem has a conservative balance sheet, and could probably eliminate its debt without much difficulty. Simply put, the fact that Enzo Biochem 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 you can't view debt in total isolation; since Enzo Biochem will need earnings to service that debt. So if you're keen to discover more about its earnings, it might be worth checking out this graph of its long term earnings trend.

In the last year Enzo Biochem wasn't profitable at an EBIT level, but managed to grow its revenue by 37%, to US$116m. Shareholders probably have their fingers crossed that it can grow its way to profits.

So How Risky Is Enzo Biochem?

While Enzo Biochem lost money on an earnings before interest and tax (EBIT) level, it actually booked a paper profit of US$5.3m. So when you consider it has net cash, along with the statutory profit, the stock probably isn't as risky as it might seem, at least in the short term. We think its revenue growth of 37% is a good sign. We'd see further strong growth as an optimistic indication. The balance sheet is clearly the area to focus on when you are analysing debt. However, not all investment risk resides within the balance sheet - far from it. For example, we've discovered 3 warning signs for Enzo Biochem (2 are a bit concerning!) that you should be aware of before investing here.

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.