Health Check: How Prudently Does Epizyme (NASDAQ:EPZM) 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.' 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 Epizyme, Inc. (NASDAQ:EPZM) does have debt on its balance sheet. But is this debt a concern to shareholders?

When Is Debt A Problem?

Debt assists a business until the business has trouble paying it off, either with new capital or with free cash flow. 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. Of course, debt can be an important tool in businesses, particularly capital heavy businesses. 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 Epizyme

What Is Epizyme's Net Debt?

The image below, which you can click on for greater detail, shows that at June 2021 Epizyme had debt of US$231.2m, up from US$81.9m in one year. However, its balance sheet shows it holds US$244.0m in cash, so it actually has US$12.8m net cash.

How Healthy Is Epizyme's Balance Sheet?

Zooming in on the latest balance sheet data, we can see that Epizyme had liabilities of US$40.9m due within 12 months and liabilities of US$244.0m due beyond that. Offsetting this, it had US$244.0m in cash and US$7.12m in receivables that were due within 12 months. So its liabilities outweigh the sum of its cash and (near-term) receivables by US$33.8m.

Given Epizyme has a market capitalization of US$496.9m, it's hard to believe these liabilities pose much threat. But there are sufficient liabilities that we would certainly recommend shareholders continue to monitor the balance sheet, going forward. Despite its noteworthy liabilities, Epizyme boasts net cash, so it's fair to say it does not have a heavy debt load! 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 Epizyme'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.

In the last year Epizyme wasn't profitable at an EBIT level, but managed to grow its revenue by 136%, to US$33m. So its pretty obvious shareholders are hoping for more growth!

So How Risky Is Epizyme?

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 Epizyme had an earnings before interest and tax (EBIT) loss, truth be told. Indeed, in that time it burnt through US$229m of cash and made a loss of US$257m. However, it has net cash of US$12.8m, so it has a bit of time before it will need more capital. The good news for shareholders is that Epizyme has dazzling revenue growth, so there's a very good chance it can boost its free cash flow in the years to come. While unprofitable companies can be risky, they can also grow hard and fast in those pre-profit years. 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. Be aware that Epizyme is showing 3 warning signs in our investment analysis , and 1 of those is concerning...

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.
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