Is Fennec Pharmaceuticals (NASDAQ:FENC) 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.' So it might be obvious that you need to consider debt, when you think about how risky any given stock is, because too much debt can sink a company. As with many other companies Fennec Pharmaceuticals Inc. (NASDAQ:FENC) makes use of debt. But should shareholders be worried about its use of debt?

When Is Debt A Problem?

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 usual (but still expensive) situation is where a company must dilute shareholders at a cheap share price simply to get debt under control. Having said that, the most common situation is where a company manages its debt reasonably well - and to its own advantage. The first step when considering a company's debt levels is to consider its cash and debt together.

See our latest analysis for Fennec Pharmaceuticals

What Is Fennec Pharmaceuticals's Net Debt?

You can click the graphic below for the historical numbers, but it shows that as of March 2024 Fennec Pharmaceuticals had US$31.3m of debt, an increase on US$25.1m, over one year. But on the other hand it also has US$51.2m in cash, leading to a US$19.8m net cash position.

A Look At Fennec Pharmaceuticals' Liabilities

The latest balance sheet data shows that Fennec Pharmaceuticals had liabilities of US$9.84m due within a year, and liabilities of US$56.3m falling due after that. On the other hand, it had cash of US$51.2m and US$10.3m worth of receivables due within a year. So it has liabilities totalling US$4.72m more than its cash and near-term receivables, combined.

Since publicly traded Fennec Pharmaceuticals shares are worth a total of US$174.6m, it seems unlikely that this level of liabilities would be a major threat. But there are sufficient liabilities that we would certainly recommend shareholders continue to monitor the balance sheet, going forward. Despite its noteworthy liabilities, Fennec Pharmaceuticals boasts net cash, so it's fair to say it does not have a heavy debt load!

Notably, Fennec Pharmaceuticals made a loss at the EBIT level, last year, but improved that to positive EBIT of US$6.2m in the last twelve months. When analysing debt levels, the balance sheet is the obvious place to start. But ultimately the future profitability of the business will decide if Fennec 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.

Finally, a company can only pay off debt with cold hard cash, not accounting profits. Fennec Pharmaceuticals may have net cash on the balance sheet, but it is still interesting to look at how well the business converts its earnings before interest and tax (EBIT) to free cash flow, because that will influence both its need for, and its capacity to manage debt. Over the last year, Fennec Pharmaceuticals actually produced more free cash flow than EBIT. There's nothing better than incoming cash when it comes to staying in your lenders' good graces.

Summing Up

We could understand if investors are concerned about Fennec Pharmaceuticals's liabilities, but we can be reassured by the fact it has has net cash of US$19.8m. And it impressed us with free cash flow of US$27m, being 440% of its EBIT. So we are not troubled with Fennec Pharmaceuticals's debt use. When analysing debt levels, the balance sheet is the obvious place to start. However, not all investment risk resides within the balance sheet - far from it. Case in point: We've spotted 2 warning signs for Fennec Pharmaceuticals you should be aware of.

At the end of the day, it's often better to focus on companies that are free from net debt. You can access our special list of such companies (all with a track record of profit growth). It's free.

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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.

Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team@simplywallst.com