Is Enanta Pharmaceuticals (NASDAQ:ENTA) Weighed On By Its Debt Load?

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.' So it might be obvious that you need to consider debt, when you think about how risky any given stock is, because too much debt can sink a company. As with many other companies Enanta Pharmaceuticals, Inc. (NASDAQ:ENTA) makes use of debt. But the real question is whether this debt is making the company risky.

When Is Debt A Problem?

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. Ultimately, if the company can't fulfill its legal obligations to repay debt, shareholders could walk away with nothing. 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. Having said that, the most common situation is where a company manages its debt reasonably well - and to its own advantage. The first step when considering a company's debt levels is to consider its cash and debt together.

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What Is Enanta Pharmaceuticals's Net Debt?

The chart below, which you can click on for greater detail, shows that Enanta Pharmaceuticals had US$1.51m in debt in June 2022; about the same as the year before. However, it does have US$253.3m in cash offsetting this, leading to net cash of US$251.8m.

How Strong Is Enanta Pharmaceuticals' Balance Sheet?

We can see from the most recent balance sheet that Enanta Pharmaceuticals had liabilities of US$23.0m falling due within a year, and liabilities of US$24.2m due beyond that. Offsetting this, it had US$253.3m in cash and US$48.2m in receivables that were due within 12 months. So it actually has US$254.3m more liquid assets than total liabilities.

This surplus suggests that Enanta Pharmaceuticals is using debt in a way that is appears to be both safe and conservative. Given it has easily adequate short term liquidity, we don't think it will have any issues 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 ultimately the future profitability of the business will decide if Enanta Pharmaceuticals can strengthen its balance sheet over time. So if you're focused on the future you can check out this free report showing analyst profit forecasts.

In the last year Enanta Pharmaceuticals had a loss before interest and tax, and actually shrunk its revenue by 7.9%, to US$89m. We would much prefer see growth.

So How Risky Is Enanta Pharmaceuticals?

Statistically speaking companies that lose money are riskier than those that make money. 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$91m of cash and made a loss of US$120m. Given it only has net cash of US$251.8m, the company may need to raise more capital if it doesn't reach break-even soon. Overall, its balance sheet doesn't seem overly risky, at the moment, but we're always cautious until we see the positive free cash flow. When analysing debt levels, the balance sheet is the obvious place to start. 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 1 warning sign for Enanta Pharmaceuticals you should know about.

Of course, if you're the type of investor who prefers buying stocks without the burden of debt, then don't hesitate to discover our exclusive list of net cash growth stocks, today.

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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.