Is Eton Pharmaceuticals (NASDAQ:ETON) A Risky Investment?

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.' It's only natural to consider a company's balance sheet when you examine how risky it is, since debt is often involved when a business collapses. We can see that Eton Pharmaceuticals, Inc. (NASDAQ:ETON) does use debt in its business. But should shareholders be worried about its use of debt?

What Risk Does Debt Bring?

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. While that is not too common, we often do see indebted companies permanently diluting shareholders because lenders force them to raise capital at a distressed price. 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 Eton Pharmaceuticals

What Is Eton Pharmaceuticals's Net Debt?

The image below, which you can click on for greater detail, shows that Eton Pharmaceuticals had debt of US$4.66m at the end of June 2024, a reduction from US$6.09m over a year. But on the other hand it also has US$17.7m in cash, leading to a US$13.0m net cash position.

How Healthy Is Eton Pharmaceuticals' Balance Sheet?

The latest balance sheet data shows that Eton Pharmaceuticals had liabilities of US$18.2m due within a year, and liabilities of US$145.0k falling due after that. Offsetting these obligations, it had cash of US$17.7m as well as receivables valued at US$4.87m due within 12 months. So it actually has US$4.21m more liquid assets than total liabilities.

This surplus suggests that Eton Pharmaceuticals has a conservative balance sheet, and could probably eliminate its debt without much difficulty. Simply put, the fact that Eton Pharmaceuticals has more cash than debt is arguably a good indication that it can manage its debt safely. When analysing debt levels, the balance sheet is the obvious place to start. But ultimately the future profitability of the business will decide if Eton 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.

Over 12 months, Eton Pharmaceuticals reported revenue of US$31m, which is a gain of 8.1%, although it did not report any earnings before interest and tax. That rate of growth is a bit slow for our taste, but it takes all types to make a world.

So How Risky Is Eton Pharmaceuticals?

We have no doubt that loss making companies are, in general, riskier than profitable ones. And we do note that Eton Pharmaceuticals had an earnings before interest and tax (EBIT) loss, over the last year. And over the same period it saw negative free cash outflow of US$2.6m and booked a US$6.7m accounting loss. While this does make the company a bit risky, it's important to remember it has net cash of US$13.0m. 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. For riskier companies like Eton Pharmaceuticals I always like to keep an eye on the long term profit and revenue trends. Fortunately, you can click to see our interactive graph of its profit, revenue, and operating cashflow.

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.