Inozyme Pharma (NASDAQ:INZY) Has Debt But No Earnings; Should You Worry?

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 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 Inozyme Pharma, Inc. (NASDAQ:INZY) does use debt in its business. But should shareholders be worried about its use of debt?

When Is Debt A Problem?

Debt and other liabilities become risky for a business when it cannot easily fulfill those obligations, either with free cash flow or by raising capital at an attractive price. If things get really bad, the lenders can take control of the business. 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. Of course, plenty of companies use debt to fund growth, without any negative consequences. When we think about a company's use of debt, we first look at cash and debt together.

See our latest analysis for Inozyme Pharma

How Much Debt Does Inozyme Pharma Carry?

You can click the graphic below for the historical numbers, but it shows that as of December 2023 Inozyme Pharma had US$44.8m of debt, an increase on US$4.14m, over one year. But on the other hand it also has US$188.6m in cash, leading to a US$143.8m net cash position.

How Strong Is Inozyme Pharma's Balance Sheet?

The latest balance sheet data shows that Inozyme Pharma had liabilities of US$14.7m due within a year, and liabilities of US$45.7m falling due after that. Offsetting these obligations, it had cash of US$188.6m as well as receivables valued at US$385.0k due within 12 months. So it actually has US$128.6m more liquid assets than total liabilities.

This surplus liquidity suggests that Inozyme Pharma's balance sheet could take a hit just as well as Homer Simpson's head can take a punch. Having regard to this fact, we think its balance sheet is as strong as an ox. Succinctly put, Inozyme Pharma boasts net cash, so it's fair to say it does not have a heavy debt load! The balance sheet is clearly the area to focus on when you are analysing debt. But it is future earnings, more than anything, that will determine Inozyme Pharma's ability to maintain a healthy balance sheet going forward. So if you want to see what the professionals think, you might find this free report on analyst profit forecasts to be interesting.

Since Inozyme Pharma doesn't have significant operating revenue, shareholders may be hoping it comes up with a great new product, before it runs out of money.

So How Risky Is Inozyme Pharma?

We have no doubt that loss making companies are, in general, riskier than profitable ones. And the fact is that over the last twelve months Inozyme Pharma lost money at the earnings before interest and tax (EBIT) line. And over the same period it saw negative free cash outflow of US$71m and booked a US$71m accounting loss. But the saving grace is the US$143.8m on the balance sheet. That means it could keep spending at its current rate for more than two years. 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. But ultimately, every company can contain risks that exist outside of the balance sheet. For example Inozyme Pharma has 4 warning signs (and 1 which makes us a bit uncomfortable) we think you should know about.

When all is said and done, sometimes its easier to focus on companies that don't even need debt. Readers can access a list of growth stocks with zero net debt 100% free, right now.

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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.