Is Eloxx Pharmaceuticals (NASDAQ:ELOX) Using Debt In A Risky Way?

David Iben put it well when he said, 'Volatility is not a risk we care about. What we care about is avoiding the permanent loss of capital.' 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. Importantly, Eloxx Pharmaceuticals, Inc. (NASDAQ:ELOX) does carry debt. But the more important question is: how much risk is that debt creating?

What Risk Does Debt Bring?

Debt assists a business until the business has trouble paying it off, either with new capital or with free cash flow. In the worst case scenario, a company can go bankrupt if it cannot pay its creditors. 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, debt can be an important tool in businesses, particularly capital heavy businesses. The first step when considering a company's debt levels is to consider its cash and debt together.

Check out our latest analysis for Eloxx Pharmaceuticals

What Is Eloxx Pharmaceuticals's Debt?

The image below, which you can click on for greater detail, shows that Eloxx Pharmaceuticals had debt of US$12.7m at the end of June 2021, a reduction from US$13.9m over a year. But on the other hand it also has US$56.7m in cash, leading to a US$44.0m net cash position.

How Healthy Is Eloxx Pharmaceuticals' Balance Sheet?

The latest balance sheet data shows that Eloxx Pharmaceuticals had liabilities of US$15.2m due within a year, and liabilities of US$4.76m falling due after that. On the other hand, it had cash of US$56.7m and US$35.0k worth of receivables due within a year. So it can boast US$36.8m more liquid assets than total liabilities.

This surplus suggests that Eloxx Pharmaceuticals is using debt in a way that is appears to be both safe and conservative. Because it has plenty of assets, it is unlikely to have trouble with its lenders. Simply put, the fact that Eloxx Pharmaceuticals has more cash than debt is arguably a good indication that it can manage its debt safely. When analysing debt levels, the balance sheet is the obvious place to start. But ultimately the future profitability of the business will decide if Eloxx Pharmaceuticals can strengthen its balance sheet over time. So if you want to see what the professionals think, you might find this free report on analyst profit forecasts to be interesting.

It seems likely shareholders hope that Eloxx Pharmaceuticals can significantly advance the business plan before too long, because it doesn't have any significant revenue at the moment.

So How Risky Is Eloxx Pharmaceuticals?

We have no doubt that loss making companies are, in general, riskier than profitable ones. And we do note that Eloxx Pharmaceuticals had an earnings before interest and tax (EBIT) loss, over the last year. And over the same period it saw negative free cash outflow of US$27m and booked a US$57m accounting loss. However, it has net cash of US$44.0m, so it has a bit of time before it will need more capital. 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. There's no doubt that we learn most about debt from the balance sheet. But ultimately, every company can contain risks that exist outside of the balance sheet. For instance, we've identified 4 warning signs for Eloxx Pharmaceuticals (2 make us uncomfortable) you should be aware of.

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.
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