Is Enzo Biochem (NYSE:ENZ) Using Debt In A Risky Way?

Howard Marks put it nicely when he said that, rather than worrying about share price volatility, 'The possibility of permanent loss is the risk I worry about... and every practical investor I know worries about.' 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 Enzo Biochem, Inc. (NYSE:ENZ) does use debt in its business. But the more important question is: how much risk is that debt creating?

What Risk Does Debt Bring?

Debt is a tool to help businesses grow, but if a business is incapable of paying off its lenders, then it exists at their mercy. Ultimately, if the company can't fulfill its legal obligations to repay debt, shareholders could walk away with nothing. However, a more usual (but still expensive) situation is where a company must dilute shareholders at a cheap share price simply to get debt under control. By replacing dilution, though, debt can be an extremely good tool for businesses that need capital to invest in growth at high rates of return. The first step when considering a company's debt levels is to consider its cash and debt together.

Check out our latest analysis for Enzo Biochem

What Is Enzo Biochem's Net Debt?

The image below, which you can click on for greater detail, shows that Enzo Biochem had debt of US$4.43m at the end of January 2022, a reduction from US$11.6m over a year. However, its balance sheet shows it holds US$33.6m in cash, so it actually has US$29.2m net cash.

How Healthy Is Enzo Biochem's Balance Sheet?

The latest balance sheet data shows that Enzo Biochem had liabilities of US$26.1m due within a year, and liabilities of US$17.5m falling due after that. Offsetting this, it had US$33.6m in cash and US$15.3m in receivables that were due within 12 months. So it actually has US$5.26m more liquid assets than total liabilities.

This short term liquidity is a sign that Enzo Biochem could probably pay off its debt with ease, as its balance sheet is far from stretched. Simply put, the fact that Enzo Biochem 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 Enzo Biochem's earnings that will influence how the balance sheet holds up in the future. 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 22%, to US$118m. 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$300k. 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 22% 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. Case in point: We've spotted 3 warning signs for Enzo Biochem you should be aware of, and 2 of them make us uncomfortable.

At the end of the day, it's often better to focus on companies that are free from net debt. You can access our special list of such companies (all with a track record of profit growth). It's free.

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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.