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.' When we think about how risky a company is, we always like to look at its use of debt, since debt overload can lead to ruin. We note that Enanta Pharmaceuticals, Inc. (NASDAQ:ENTA) does have debt on its balance sheet. But should shareholders be worried about its use of debt?

What Risk Does Debt Bring?

Debt assists a business until the business has trouble paying it off, either with new capital or with free cash flow. 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, debt can be an important tool in businesses, particularly capital heavy businesses. When we examine debt levels, we first consider both cash and debt levels, together.

What Is Enanta Pharmaceuticals's Net Debt?

As you can see below, at the end of March 2024, Enanta Pharmaceuticals had US$182.9m of debt, up from US$1.42m a year ago. Click the image for more detail. But it also has US$300.3m in cash to offset that, meaning it has US$117.4m net cash.

How Healthy Is Enanta Pharmaceuticals' Balance Sheet?

Zooming in on the latest balance sheet data, we can see that Enanta Pharmaceuticals had liabilities of US$54.6m due within 12 months and liabilities of US$192.8m due beyond that. Offsetting these obligations, it had cash of US$300.3m as well as receivables valued at US$39.8m due within 12 months. So it actually has US$92.7m more liquid assets than total liabilities.

This excess liquidity suggests that Enanta Pharmaceuticals is taking a careful approach to debt. Given it has easily adequate short term liquidity, we don't think it will have any issues with its lenders. Simply put, the fact that Enanta 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 Enanta 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.

In the last year Enanta Pharmaceuticals had a loss before interest and tax, and actually shrunk its revenue by 10%, to US$73m. We would much prefer see growth.

So How Risky Is Enanta Pharmaceuticals?

Statistically speaking companies that lose money are riskier than those that make money. And we do note that Enanta 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$113m and booked a US$132m accounting loss. While this does make the company a bit risky, it's important to remember it has net cash of US$117.4m. 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. 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. We've identified 1 warning sign with Enanta Pharmaceuticals , and understanding them should be part of your investment process.

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.

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