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. As with many other companies Enanta Pharmaceuticals, Inc. (NASDAQ:ENTA) makes use of debt. But is this debt a concern to shareholders?

Why Does Debt Bring Risk?

Debt assists a business until the business has trouble paying it off, either with new capital or with free cash flow. Ultimately, if the company can't fulfill its legal obligations to repay debt, shareholders could walk away with nothing. However, a more usual (but still expensive) situation is where a company must dilute shareholders at a cheap share price simply to get debt under control. 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.

View our latest analysis for Enanta Pharmaceuticals

What Is Enanta Pharmaceuticals's Net Debt?

As you can see below, at the end of March 2024, Enanta Pharmaceuticals had US$182.9m of debt, up from US$1.42m a year ago. Click the image for more detail. But it also has US$300.3m in cash to offset that, meaning it has US$117.4m net cash.

A Look At Enanta Pharmaceuticals' Liabilities

According to the last reported balance sheet, Enanta Pharmaceuticals had liabilities of US$54.6m due within 12 months, and liabilities of US$192.8m due beyond 12 months. Offsetting this, it had US$300.3m in cash and US$39.8m in receivables that were due within 12 months. So it can boast US$92.7m more liquid assets than total liabilities.

This surplus strongly suggests that Enanta Pharmaceuticals has a rock-solid balance sheet (and the debt is of no concern whatsoever). Having regard to this fact, we think its balance sheet is as strong as an ox. Simply put, the fact that Enanta Pharmaceuticals has more cash than debt is arguably a good indication that it can manage its debt safely. 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$73m, which is a fall of 10%. That's not what we would hope to see.

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 the fact is that over the last twelve months Enanta Pharmaceuticals lost money at the earnings before interest and tax (EBIT) line. And over the same period it saw negative free cash outflow of US$113m and booked a US$132m accounting loss. But the saving grace is the US$117.4m on the balance sheet. That means it could keep spending at its current rate for more than two years. 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. For example, we've discovered 1 warning sign for Enanta Pharmaceuticals that you should be aware of before investing here.

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.

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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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