Is Eton Pharmaceuticals (NASDAQ:ETON) Using Too Much Debt?

Warren Buffett famously said, 'Volatility is far from synonymous with risk.' 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. As with many other companies Eton Pharmaceuticals, Inc. (NASDAQ:ETON) makes use of debt. But is this debt a concern to shareholders?

When Is Debt Dangerous?

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 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 step when considering a company's debt levels is to consider its cash and debt together.

Check out our latest analysis for Eton Pharmaceuticals

What Is Eton Pharmaceuticals's Net Debt?

As you can see below, Eton Pharmaceuticals had US$6.45m of debt, at March 2023, which is about the same as the year before. You can click the chart for greater detail. But it also has US$14.7m in cash to offset that, meaning it has US$8.26m net cash.

How Healthy Is Eton Pharmaceuticals' Balance Sheet?

We can see from the most recent balance sheet that Eton Pharmaceuticals had liabilities of US$7.49m falling due within a year, and liabilities of US$5.19m due beyond that. Offsetting this, it had US$14.7m in cash and US$2.87m in receivables that were due within 12 months. So it can boast US$4.90m 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. Succinctly put, Eton Pharmaceuticals boasts net cash, so it's fair to say it does not have a heavy debt load! 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$24m, which is a gain of 101%, although it did not report any earnings before interest and tax. So there's no doubt that shareholders are cheering for growth

So How Risky Is Eton Pharmaceuticals?

Statistically speaking companies that lose money are riskier than those that make money. 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$723k and booked a US$6.4m accounting loss. With only US$8.26m on the balance sheet, it would appear that its going to need to raise capital again soon. Importantly, Eton Pharmaceuticals's revenue growth is hot to trot. High growth pre-profit companies may well be 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 example - Eton Pharmaceuticals has 2 warning signs we think 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.

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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.