Enochian Biosciences (NASDAQ:ENOB) Has Debt But No Earnings; Should You Worry?

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.' 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. We note that Enochian Biosciences, Inc. (NASDAQ:ENOB) does have debt on its balance sheet. But is this debt a concern to shareholders?

Why Does Debt Bring Risk?

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. If things get really bad, the lenders can take control of the business. However, a more frequent (but still costly) occurrence is where a company must issue shares at bargain-basement prices, permanently diluting shareholders, just to shore up its balance sheet. 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.

See our latest analysis for Enochian Biosciences

What Is Enochian Biosciences's Debt?

The chart below, which you can click on for greater detail, shows that Enochian Biosciences had US$5.84m in debt in June 2021; about the same as the year before. But on the other hand it also has US$20.7m in cash, leading to a US$14.8m net cash position.

How Healthy Is Enochian Biosciences' Balance Sheet?

We can see from the most recent balance sheet that Enochian Biosciences had liabilities of US$1.89m falling due within a year, and liabilities of US$13.1m due beyond that. On the other hand, it had cash of US$20.7m and US$1.6k worth of receivables due within a year. So it can boast US$5.72m more liquid assets than total liabilities.

This state of affairs indicates that Enochian Biosciences' balance sheet looks quite solid, as its total liabilities are just about equal to its liquid assets. So while it's hard to imagine that the US$464.2m company is struggling for cash, we still think it's worth monitoring its balance sheet. Succinctly put, Enochian Biosciences 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 Enochian Biosciences's earnings that will influence how the balance sheet holds up in the future. So when considering debt, it's definitely worth looking at the earnings trend. Click here for an interactive snapshot.

Since Enochian Biosciences doesn't have significant operating revenue, shareholders may be hoping it comes up with a great new product, before it runs out of money.

So How Risky Is Enochian Biosciences?

We have no doubt that loss making companies are, in general, riskier than profitable ones. And the fact is that over the last twelve months Enochian Biosciences lost money at the earnings before interest and tax (EBIT) line. And over the same period it saw negative free cash outflow of US$21m and booked a US$27m accounting loss. But at least it has US$14.8m on the balance sheet to spend on growth, near-term. 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 5 warning signs for Enochian Biosciences (3 can't be ignored) 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.

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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