Is Epizyme (NASDAQ:EPZM) Using Too Much Debt?

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 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. Importantly, Epizyme, Inc. (NASDAQ:EPZM) does carry debt. But should shareholders be worried about its use of debt?

When Is Debt Dangerous?

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 common (but still painful) scenario is that it has to raise new equity capital at a low price, thus permanently diluting shareholders. Of course, plenty of companies use debt to fund growth, without any negative consequences. 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?

As you can see below, at the end of March 2021, Epizyme had US$230.5m of debt, up from US$61.5m a year ago. Click the image for more detail. However, it does have US$298.9m in cash offsetting this, leading to net cash of US$68.4m.

A Look At Epizyme's Liabilities

The latest balance sheet data shows that Epizyme had liabilities of US$39.0m due within a year, and liabilities of US$244.7m falling due after that. On the other hand, it had cash of US$298.9m and US$9.76m worth of receivables due within a year. So it actually has US$25.0m more liquid assets than total liabilities.

This surplus suggests that Epizyme has a conservative balance sheet, and could probably eliminate its debt without much difficulty. Succinctly put, 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 ultimately the future profitability of the business will decide if Epizyme 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.

Over 12 months, Epizyme reported revenue of US$22m, which is a gain of 28%, although it did not report any earnings before interest and tax. With any luck the company will be able to grow its way to profitability.

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$250m of cash and made a loss of US$251m. But at least it has US$68.4m on the balance sheet to spend on growth, near-term. Epizyme's revenue growth shone bright over the last year, so it may well be in a position to turn a profit in due course. Pre-profit companies are often risky, but they can also offer great rewards. 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. For instance, we've identified 1 warning sign for Epizyme that you should be aware of.

If, after all that, you're more interested in a fast growing company with a rock-solid balance sheet, then check out our list of net cash growth stocks without delay.

If you decide to trade Epizyme, use the lowest-cost* platform that is rated #1 Overall by Barron’s, Interactive Brokers. Trade stocks, options, futures, forex, bonds and funds on 135 markets, all from a single integrated account. Promoted

This article by Simply Wall St is general in nature. 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.
^*Interactive Brokers Rated Lowest Cost Broker by StockBrokers.com Annual Online Review 2020

Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team (at) simplywallst.com.