These 4 Measures Indicate That Eagle Pharmaceuticals (NASDAQ:EGRX) Is Using Debt Safely

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 Eagle Pharmaceuticals, Inc. (NASDAQ:EGRX) does use debt in its business. But the more important question is: how much risk is that debt creating?

When Is Debt Dangerous?

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. If things get really bad, the lenders can take control of the business. 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. Of course, plenty of companies use debt to fund growth, without any negative consequences. When we examine debt levels, we first consider both cash and debt levels, together.

Check out our latest analysis for Eagle Pharmaceuticals

What Is Eagle Pharmaceuticals's Net Debt?

As you can see below, at the end of June 2022, Eagle Pharmaceuticals had US$49.9m of debt, up from US$29.4m a year ago. Click the image for more detail. However, it does have US$36.6m in cash offsetting this, leading to net debt of about US$13.3m.

A Look At Eagle Pharmaceuticals' Liabilities

Zooming in on the latest balance sheet data, we can see that Eagle Pharmaceuticals had liabilities of US$109.0m due within 12 months and liabilities of US$34.8m due beyond that. Offsetting these obligations, it had cash of US$36.6m as well as receivables valued at US$93.1m due within 12 months. So its liabilities outweigh the sum of its cash and (near-term) receivables by US$14.1m.

Given Eagle Pharmaceuticals has a market capitalization of US$408.8m, it's hard to believe these liabilities pose much threat. Having said that, it's clear that we should continue to monitor its balance sheet, lest it change for the worse.

We use two main ratios to inform us about debt levels relative to earnings. The first is net debt divided by earnings before interest, tax, depreciation, and amortization (EBITDA), while the second is how many times its earnings before interest and tax (EBIT) covers its interest expense (or its interest cover, for short). Thus we consider debt relative to earnings both with and without depreciation and amortization expenses.

Eagle Pharmaceuticals has a low net debt to EBITDA ratio of only 0.21. And its EBIT easily covers its interest expense, being 60.9 times the size. So you could argue it is no more threatened by its debt than an elephant is by a mouse. On top of that, Eagle Pharmaceuticals grew its EBIT by 94% over the last twelve months, and that growth will make it easier to handle its debt. When analysing debt levels, the balance sheet is the obvious place to start. But it is future earnings, more than anything, that will determine Eagle 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.

But our final consideration is also important, because a company cannot pay debt with paper profits; it needs cold hard cash. So we always check how much of that EBIT is translated into free cash flow. Over the last three years, Eagle Pharmaceuticals actually produced more free cash flow than EBIT. There's nothing better than incoming cash when it comes to staying in your lenders' good graces.

Our View

Eagle Pharmaceuticals's interest cover suggests it can handle its debt as easily as Cristiano Ronaldo could score a goal against an under 14's goalkeeper. And the good news does not stop there, as its conversion of EBIT to free cash flow also supports that impression! It looks Eagle Pharmaceuticals has no trouble standing on its own two feet, and it has no reason to fear its lenders. To our minds it has a healthy happy balance sheet. When analysing debt levels, the balance sheet is the obvious place to start. However, not all investment risk resides within the balance sheet - far from it. Be aware that Eagle Pharmaceuticals is showing 2 warning signs in our investment analysis , and 1 of those is significant...

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.