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Warren Buffett famously said, 'Volatility is far from synonymous with risk.' 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 note that Enochian Biosciences, Inc. (NASDAQ:ENOB) does have debt on its balance sheet. But the more important question is: how much risk is that debt creating?
When Is Debt Dangerous?
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. If things get really bad, the lenders can take control of the business. 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. Having said that, the most common situation is where a company manages its debt reasonably well - and to its own advantage. When we examine debt levels, we first consider both cash and debt levels, together.
What Is Enochian Biosciences's Debt?
The chart below, which you can click on for greater detail, shows that Enochian Biosciences had US$5.78m in debt in June 2021; about the same as the year before. But on the other hand it also has US$20.7m in cash, leading to a US$14.9m net cash position.
How Strong Is Enochian Biosciences' Balance Sheet?
Zooming in on the latest balance sheet data, we can see that Enochian Biosciences had liabilities of US$1.89m due within 12 months and liabilities of US$13.1m due beyond that. Offsetting this, it had US$20.7m in cash and US$1.6k in receivables that were due within 12 months. So it can boast US$5.72m more liquid assets than total liabilities.
This state of affairs indicates that Enochian Biosciences' balance sheet looks quite solid, as its total liabilities are just about equal to its liquid assets. So it's very unlikely that the US$382.4m company is short on cash, but still worth keeping an eye on the balance sheet. Simply put, the fact that Enochian Biosciences 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 it is Enochian Biosciences's earnings that will influence how the balance sheet holds up in the future. So when considering debt, it's definitely worth looking at the earnings trend. Click here for an interactive snapshot.
Since Enochian Biosciences 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 Enochian Biosciences?
By their very nature companies that are losing money are more risky than those with a long history of profitability. And in the last year Enochian Biosciences had an earnings before interest and tax (EBIT) loss, truth be told. And over the same period it saw negative free cash outflow of US$21m and booked a US$27m accounting loss. However, it has net cash of US$14.9m, so it has a bit of time before it will need more capital. 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. To that end, you should learn about the 5 warning signs we've spotted with Enochian Biosciences (including 3 which are potentially serious) .
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.
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.
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