Health Check: How Prudently Does Enanta Pharmaceuticals (NASDAQ:ENTA) Use Debt?

The external fund manager backed by Berkshire Hathaway's Charlie Munger, Li Lu, makes no bones about it when he says 'The biggest investment risk is not the volatility of prices, but whether you will suffer a permanent loss of capital.' It's only natural to consider a company's balance sheet when you examine how risky it is, since debt is often involved when a business collapses. Importantly, Enanta Pharmaceuticals, Inc. (NASDAQ:ENTA) does carry debt. But should shareholders be worried about its use of debt?

Why Does Debt Bring Risk?

Generally speaking, debt only becomes a real problem when a company can't easily pay it off, either by raising capital or with its own cash flow. Ultimately, if the company can't fulfill its legal obligations to repay debt, shareholders could walk away with nothing. 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. 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 thing to do when considering how much debt a business uses is to look at its cash and debt together.

Check out our latest analysis for Enanta Pharmaceuticals

What Is Enanta Pharmaceuticals's Net Debt?

As you can see below, Enanta Pharmaceuticals had US$175.6m of debt at June 2024, down from US$203.1m a year prior. However, it does have US$230.1m in cash offsetting this, leading to net cash of US$54.5m.

How Healthy Is Enanta Pharmaceuticals' Balance Sheet?

According to the last reported balance sheet, Enanta Pharmaceuticals had liabilities of US$58.2m due within 12 months, and liabilities of US$191.7m due beyond 12 months. Offsetting these obligations, it had cash of US$230.1m as well as receivables valued at US$40.6m due within 12 months. So it actually has US$20.8m more liquid assets than total liabilities.

This surplus suggests that Enanta Pharmaceuticals has a conservative balance sheet, and could probably eliminate its debt without much difficulty. Succinctly put, Enanta Pharmaceuticals boasts net cash, so it's fair to say it does not have a heavy debt load! The balance sheet is clearly the area to focus on when you are analysing debt. But it is future earnings, more than anything, that will determine Enanta 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.

Over 12 months, Enanta Pharmaceuticals made a loss at the EBIT level, and saw its revenue drop to US$72m, which is a fall of 11%. We would much prefer see growth.

So How Risky Is Enanta Pharmaceuticals?

By their very nature companies that are losing money are more risky than those with a long history of profitability. And in the last year Enanta Pharmaceuticals had an earnings before interest and tax (EBIT) loss, truth be told. Indeed, in that time it burnt through US$100m of cash and made a loss of US$115m. However, it has net cash of US$54.5m, 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. These risks can be hard to spot. Every company has them, and we've spotted 2 warning signs for Enanta Pharmaceuticals (of which 1 is a bit unpleasant!) you should know about.

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.