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

Why Does Debt Bring Risk?

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. Part and parcel of capitalism is the process of 'creative destruction' where failed businesses are mercilessly liquidated by their bankers. However, a more frequent (but still costly) occurrence is where a company must issue shares at bargain-basement prices, permanently diluting shareholders, just to shore up its balance sheet. By replacing dilution, though, debt can be an extremely good tool for businesses that need capital to invest in growth at high rates of return. The first thing to do when considering how much debt a business uses is to look at its cash and debt together.

View our latest analysis for EyePoint Pharmaceuticals

What Is EyePoint Pharmaceuticals's Net Debt?

As you can see below, EyePoint Pharmaceuticals had US$39.6m of debt, at March 2022, which is about the same as the year before. You can click the chart for greater detail. But it also has US$190.8m in cash to offset that, meaning it has US$151.2m net cash.

How Strong Is EyePoint Pharmaceuticals' Balance Sheet?

Zooming in on the latest balance sheet data, we can see that EyePoint Pharmaceuticals had liabilities of US$32.0m due within 12 months and liabilities of US$45.8m due beyond that. Offsetting these obligations, it had cash of US$190.8m as well as receivables valued at US$19.6m due within 12 months. So it can boast US$132.6m more liquid assets than total liabilities.

This surplus liquidity suggests that EyePoint Pharmaceuticals' balance sheet could take a hit just as well as Homer Simpson's head can take a punch. With this in mind one could posit that its balance sheet means the company is able to handle some adversity. Simply put, the fact that EyePoint 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 it is future earnings, more than anything, that will determine EyePoint 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.

In the last year EyePoint Pharmaceuticals wasn't profitable at an EBIT level, but managed to grow its revenue by 14%, to US$39m. We usually like to see faster growth from unprofitable companies, but each to their own.

So How Risky Is EyePoint 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 EyePoint Pharmaceuticals had an earnings before interest and tax (EBIT) loss, over the last year. Indeed, in that time it burnt through US$55m of cash and made a loss of US$67m. Given it only has net cash of US$151.2m, the company may need to raise more capital if it doesn't reach break-even soon. 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. The balance sheet is clearly the area to focus on when you are analysing debt. But ultimately, every company can contain risks that exist outside of the balance sheet. For instance, we've identified 2 warning signs for EyePoint Pharmaceuticals 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.

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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.