Health Check: How Prudently Does EyePoint Pharmaceuticals (NASDAQ:EYPT) Use Debt?

David Iben put it well when he said, 'Volatility is not a risk we care about. What we care about is avoiding the permanent loss of capital.' 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. We can see that EyePoint Pharmaceuticals, Inc. (NASDAQ:EYPT) does use debt in its business. But the more important question is: how much risk is that debt creating?

Why Does Debt Bring Risk?

Debt assists a business until the business has trouble paying it off, either with new capital or with free cash flow. Part and parcel of capitalism is the process of 'creative destruction' where failed businesses are mercilessly liquidated by their bankers. 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, 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 EyePoint Pharmaceuticals

What Is EyePoint Pharmaceuticals's Debt?

As you can see below, EyePoint Pharmaceuticals had US$36.6m of debt, at December 2021, which is about the same as the year before. You can click the chart for greater detail. But it also has US$211.6m in cash to offset that, meaning it has US$175.0m net cash.

A Look At EyePoint Pharmaceuticals' Liabilities

According to the last reported balance sheet, EyePoint Pharmaceuticals had liabilities of US$23.7m due within 12 months, and liabilities of US$55.3m due beyond 12 months. Offsetting this, it had US$211.6m in cash and US$18.4m in receivables that were due within 12 months. So it actually has US$150.9m more liquid assets than total liabilities.

This excess liquidity is a great indication that EyePoint Pharmaceuticals' balance sheet is almost as strong as Fort Knox. Having regard to this fact, we think its balance sheet is as strong as an ox. Simply put, the fact that EyePoint 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 ultimately the future profitability of the business will decide if EyePoint Pharmaceuticals can strengthen its balance sheet over time. So if you want to see what the professionals think, you might find this free report on analyst profit forecasts to be interesting.

Over 12 months, EyePoint Pharmaceuticals reported revenue of US$37m, which is a gain of 7.3%, 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 EyePoint Pharmaceuticals?

Statistically speaking companies that lose money are riskier than those that make money. And in the last year EyePoint Pharmaceuticals had an earnings before interest and tax (EBIT) loss, truth be told. And over the same period it saw negative free cash outflow of US$28m and booked a US$58m accounting loss. With only US$175.0m 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. There's no doubt that we learn most about debt from the balance sheet. However, not all investment risk resides within the balance sheet - far from it. We've identified 3 warning signs with EyePoint Pharmaceuticals , and understanding them should be part of your investment process.

If you're interested in investing in businesses that can grow profits without the burden of debt, then check out this free list of growing businesses that have net cash on the balance sheet.

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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.