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.' 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 can see that Fennec Pharmaceuticals Inc. (NASDAQ:FENC) does use debt in its business. But the more important question is: how much risk is that debt creating?

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. The first step when considering a company's debt levels is to consider its cash and debt together.

What Is Fennec Pharmaceuticals's 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. However, its balance sheet shows it holds US$51.2m in cash, so it actually has US$19.8m net cash.

How Healthy Is Fennec Pharmaceuticals' Balance Sheet?

According to the last reported balance sheet, Fennec Pharmaceuticals had liabilities of US$9.84m due within 12 months, and liabilities of US$56.3m due beyond 12 months. Offsetting these obligations, it had cash of US$51.2m as well as receivables valued at US$10.3m due within 12 months. So it has liabilities totalling US$4.72m more than its cash and near-term receivables, combined.

Of course, Fennec Pharmaceuticals has a market capitalization of US$192.3m, so these liabilities are probably manageable. But there are sufficient liabilities that we would certainly recommend shareholders continue to monitor the balance sheet, going forward. While it does have liabilities worth noting, Fennec Pharmaceuticals also has more cash than debt, so we're pretty confident it can manage its debt safely.

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. 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 Fennec 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.

Finally, a business needs free cash flow to pay off debt; accounting profits just don't cut it. While Fennec Pharmaceuticals has net cash on its balance sheet, it's still worth taking a look at its ability to convert earnings before interest and tax (EBIT) to free cash flow, to help us understand how quickly it is building (or eroding) that cash balance. Happily for any shareholders, Fennec Pharmaceuticals actually produced more free cash flow than EBIT over the last year. That sort of strong cash generation warms our hearts like a puppy in a bumblebee suit.

Summing Up

While it is always sensible to look at a company's total liabilities, it is very reassuring that Fennec Pharmaceuticals has US$19.8m in net cash. 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. 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. Case in point: We've spotted 2 warning signs for Fennec Pharmaceuticals you should be aware of.

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.