Is Enanta Pharmaceuticals (NASDAQ:ENTA) Using Debt In A Risky Way?

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.' So it seems the smart money knows that debt - which is usually involved in bankruptcies - is a very important factor, when you assess how risky a company is. We note that Enanta Pharmaceuticals, Inc. (NASDAQ:ENTA) does have debt on its balance sheet. But is this debt a concern to shareholders?

When Is Debt A Problem?

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. In the worst case scenario, a company can go bankrupt if it cannot pay its creditors. 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. Of course, the upside of debt is that it often represents cheap capital, especially when it replaces dilution in a company with the ability to reinvest 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.

View our latest analysis for Enanta Pharmaceuticals

How Much Debt Does Enanta Pharmaceuticals Carry?

As you can see below, Enanta Pharmaceuticals had US$1.51m of debt, at September 2021, which is about the same as the year before. You can click the chart for greater detail. However, it does have US$244.0m in cash offsetting this, leading to net cash of US$242.5m.

How Strong Is Enanta Pharmaceuticals' Balance Sheet?

We can see from the most recent balance sheet that Enanta Pharmaceuticals had liabilities of US$36.2m falling due within a year, and liabilities of US$3.19m due beyond that. On the other hand, it had cash of US$244.0m and US$60.8m worth of receivables due within a year. So it actually has US$265.5m more liquid assets than total liabilities.

It's good to see that Enanta Pharmaceuticals has plenty of liquidity on its balance sheet, suggesting conservative management of liabilities. Because it has plenty of assets, it is unlikely to have trouble with its lenders. Simply put, the fact that Enanta Pharmaceuticals 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 future earnings, more than anything, that will determine Enanta Pharmaceuticals's ability to maintain a healthy balance sheet going forward. So if you're focused on the future you can check out this free report showing analyst profit forecasts.

Over 12 months, Enanta Pharmaceuticals made a loss at the EBIT level, and saw its revenue drop to US$97m, which is a fall of 21%. That makes us nervous, to say the least.

So How Risky Is Enanta Pharmaceuticals?

Statistically speaking companies that lose money are riskier than those that make money. And we do note that Enanta Pharmaceuticals had an earnings before interest and tax (EBIT) loss, over the last year. Indeed, in that time it burnt through US$65m of cash and made a loss of US$79m. With only US$242.5m on the balance sheet, it would appear that its going to need to raise capital again soon. 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. 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. To that end, you should be aware of the 1 warning sign we've spotted with Enanta Pharmaceuticals .

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.

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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