Is Eton Pharmaceuticals (NASDAQ:ETON) 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.' 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 Eton Pharmaceuticals, Inc. (NASDAQ:ETON) does have debt on its balance sheet. But the more important question is: how much risk is that debt creating?

When Is Debt A Problem?

Generally speaking, debt only becomes a real problem when a company can't easily pay it off, either by raising capital or with its own cash flow. 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, debt can be an important tool in businesses, particularly capital heavy businesses. The first step when considering a company's debt levels is to consider its cash and debt together.

View our latest analysis for Eton Pharmaceuticals

What Is Eton Pharmaceuticals's Net Debt?

You can click the graphic below for the historical numbers, but it shows that as of December 2020 Eton Pharmaceuticals had US$7.04m of debt, an increase on US$4.54m, over one year. However, it does have US$21.3m in cash offsetting this, leading to net cash of US$14.3m.

A Look At Eton Pharmaceuticals' Liabilities

Zooming in on the latest balance sheet data, we can see that Eton Pharmaceuticals had liabilities of US$3.79m due within 12 months and liabilities of US$6.86m due beyond that. On the other hand, it had cash of US$21.3m and US$48.0k worth of receivables due within a year. So it actually has US$10.7m more liquid assets than total liabilities.

This short term liquidity is a sign that Eton Pharmaceuticals could probably pay off its debt with ease, as its balance sheet is far from stretched. Simply put, the fact that Eton 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 it is future earnings, more than anything, that will determine Eton Pharmaceuticals'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.

Given it has no significant operating revenue at the moment, shareholders will be hoping Eton Pharmaceuticals can make progress and gain better traction for the business, before it runs low on cash.

So How Risky Is Eton Pharmaceuticals?

By their very nature companies that are losing money are more risky than those with a long history of profitability. 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$22m and booked a US$28m accounting loss. With only US$14.3m on the balance sheet, it would appear that its going to need to raise capital again 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. To that end, you should learn about the 4 warning signs we've spotted with Eton Pharmaceuticals (including 2 which make us uncomfortable) .

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.

If you’re looking to trade Eton Pharmaceuticals, open an account with the lowest-cost* platform trusted by professionals, Interactive Brokers. Their clients from over 200 countries and territories trade stocks, options, futures, forex, bonds and funds worldwide 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.